Ministry of Energy, Green Technology and Water Malaysia

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This report has been prepared based on in-depth consultations and series of discussions with various stakeholders including the Members of Parliament, the Government authorities and agencies, the electricity supply industry, the power utilities, the RE industry, the professional bodies, the NGOs, the consumers associations, the national and international experts, and other relevant parties, as presented to and endorsed by the Jawatankuasa Perancangan Pelaksanaan Pembekalan Elektrik Dan Tarif (JPPPET) on 17th November 2008. While this report is exhaustive, it is not absolutely inclusive whereby any detail analysis and baseline information which are not included are available from Pusat Tenaga Malaysia.

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EXECUTIVE SUMMARYSince 2001 Malaysia has experimented with a Renewable Energy (RE) policy that is focused on market forces to deliver the intended outcomes and treating RE as a mere fuel for electricity generation. The result of the last 8 years provides valuable lessons in identifying the issues from such an approach. The key lesson is that a business-as-usual approach is not sustainable, appropriate nor productive. Renewable energy policy must be recognised as a convergence of energy, industrial and environmental policies; and through such recognition a more effective policy can be designed. The reasons for the introduction of a new convergent and forward-looking RE policy are: (1) Address market failure. The evidence shows that the market has failed to produce the desired outcome, particularly because of the lack of a proper and effective regulatory framework; Provision of long-term sustainability by avoiding stop-start strategies, having sufficiency of the outcomes and securing the commitment of all stakeholders; Provision of a new growth industry in Malaysia; Recognising that the environment is an economic growth contributor, which can be leveraged to spur innovation (as compared to invention); Effectively diffuse RE technology, thereby improving on human capital and utilisation; and Avoidance of the incoherence of existing RE policy and the sending of mixed signals that affect business decisions.

(2) (3) (4) (5) (6)

The evidences gleaned from the last 8 years of the SREP programme, the Biogen and the MBIPV projects establish the existence of 8 issues which if not addressed would perpetuate the problems indefinitely, namely:

Issues (1) Market failure exists:

Drawing Lessons Market failure will be perpetuated unless the causes of such failure, viz. unequal bargaining position of the utility and RE project proponents, significant transaction costs in terms of the time needed to conclude a REPPA, and the monospony power of the utility to agree to the requests of the RE project proponent, are properly addressed.

The RE market fails due to misuse of monopsony power and information asymmetries; the RE market is also constrained by financial and technological factors. (2) Constraints: the

The market should not be relied upon solely to achieve the intended outcome as steps should be taken to ameliorate the economic, financial and technological constraints that are impeding market performance. RE prices must be based on sound economic principles and allow for full cost recovery. Anything less will affect the viability of the RE project. The predicament can be addressed by the introduction of a mechanism for sharing the cost of RE amongst all members of society, as environmental improvement is a non-excludable public good.

RE prices set arbitrarily. (4) Tensions and trade-offs:

The predicament of expecting that the utility will bear the higher costs of RE power (due to the higher RE price).

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Issues (5) Absence of Framework: Regulatory

Drawing Lessons Regulatory frameworks provide the necessary foundation for achieving the desired outcome, and it sends a strong signal to the market of the governments commitment. The existing ESA is inadequate, inappropriate and insufficient to be used as the legal basis to support RE businesses growth.

Market failure compounded by absence of a proper regulatory framework, which prevents proper and legal action from being taken. (6) Poor governance:

Poor governance affects the participation of stakeholders and legitimacy of the action. (7) Limited Oversight:

Governance can be strengthened and improved through the introduction of the regulatory framework where governance principles are embedded.

Oversight and implemented function need to be in separate organisations for improved accountability;

No concerted oversight of implementation problems. (8) Lack of institutional measures: Information asymmetry needs to be overcome through proper information dissemination, advocacy and awareness actions. Access to and the type of information should be made available expeditiously in order to assist in the private firms decision making process with regards to investing in RE.

Renewable Energy (RE) Policy

Therefore the proposed forward-looking RE Policy comprises:

(1)

A Policy Vision that provides for the long-term goals that all stakeholders should strive towards realisation. Enhancing the utilisation of indigenous renewable energy resources to contribute towards National electricity supply security and sustainable socioeconomic development.

(2)

5 Policy Objectives: The forward looking RE Policy has five objectives that embody elements of energy, industry and environmental policies, making it convergent in nature. (1) (2) (3) (4) (5) To increase RE contribution in the national power generation mix; To facilitate the growth of the RE industry; To ensure reasonable RE generation costs; To conserve the environment for future generation; and To enhance awareness on the role and importance of RE.

(3)

Policy Mission: To achieve these five policy objectives, a policy mission comprising five strategic thrusts have been identified; namely:

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Thrust 1:

Introduce appropriate regulatory framework

This requires that an appropriate, robust and efficient regulatory framework that addresses market failures and provides incentives for firms to enter into the RE generation market, be introduced. The regulatory framework should provide for the introduction of a feed-in-tariff (FiT) which will act as a catalyst for the entry of RE power generation businesses, RE industries and R&D in RE. Furthermore with the reduction of environmental pollution, society benefits; and this means that society must play its part by contributing to a fund to be used to pay for the RE power (particularly as the retail tariffs contain subsidies and have today been reduced, and exclude the external costs). Payment of this contribution, which can be embedded into the electricity tariff structure, must be made to a specific RE Fund and not part of the receipts by Government (as such receipts must be paid into the Consolidated Fund). There are consequently direct spill-over effects as such a regulatory framework would act as a catalyst for the emergence of RE industries, undertaking of R&D in RE technology and innovation (e.g. via improved boiler technologies etc.). The measurable outcomes of this thrust include the rate of increase in use of RE, the decreasing (or constant) rate of fossil fuel consumption for conventional power generation and reduction of the CO2 emissions. Thrust 2:nd

Introduce conducive stimulus package for RE businesses

The 2 Policy Objective identifies the growth of the RE industry. A definition of the st RE industry provides clarity of the ambit of this industrial sector. Since the 1 Policy Objective refers to RE generation, which would cover generation, distribution and sale of energy, it is proposed that the term RE industry refers to the manufacturing of RE components or RE finished products (e.g. boilers, turbines, PV modules, etc.), support industries to the RE manufacturing sector, and RE service providers (e.g. technicians, consultants, engineers, builders) who support RE power generation. The focus of this thrust is on RE industry and RE power generation (which collectively are referred to as RE businesses). The stimulus package would encompass the provision of fiscal incentives, and indirect assistance in the form of reducing the transaction costs for financing, using GLCs and MNCs to lead the charge, and providing assistance to SMEs to participate in the RE business. These are in addition to the feed-in tariff that of itself provides a stimulus for people to enter the RE power generation sector.

Thrust 3:

Intensify human capital development

RE is a new technology in Malaysia and there is a need for human capital to be developed in order to support the emerging RE Industries. Yet there is a need for a short-term (stop-gap) measure to fill the human capital void in Malaysia by encouraging knowledge workers to relocate to Malaysia.

Thrust 4:

Enhance RE research and development

1 2

The focus of the R&D is not on invention but on innovation . For example, the improvements in the microchip were due to innovation (i.e. the idea of standing on the shoulders of giants).

Invention is defined as the creation of a new product or process.

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Therefore the implementation of a systemic R&D programme that leads to innovative products and services is preferable as this can accelerate the growth of the RE Industry. Innovation also enhances the diffusion of RE technology by making the technology cheaper and easier to use. This can strengthen businesses competitive edge. Thus, it is necessary to develop an R&D implementation plan that articulates the demand, identifies the use of regulation to spur innovation and provides appropriate support for R&D activities.

Thrust 5:

Design and implement an RE advocacy programme

Advocacy programmes that are tailored with specific messages for specific audiences should be implemented. For example an advocacy programme targeted at investors and RE market entrants will need to convey a message that is subtly different from that of a general public advocacy programme designed to secure buy-in to the idea of societal payments for clean environment. The common aim of all advocacy programmes is to increase the awareness of all stakeholders of the benefits and advantages of utilising RE and participation in RE businesses.

Thrust 1 is the foundation for the five policy objectives, whilst Thrusts 2, 3 and 4 provide the stimulus for businesses to enter this market, the necessary knowledge workers and the competitive advantage. Since the RE Policy is a forward-looking policy with new approaches it is important for its success that buy-in by relevant stakeholders and society at large is secured. Hence the advocacy programme in Thrust 5. The contributory role of these respective thrusts in achieving the five policy objectives are shown in the matrix below:

Yes Yes Yes Yes

Yes Yes Yes Yes

Yes Yes Yes Yes

Yes Yes Yes Yes

T3: T4: T5:

Innovation is defined as the making of changes in existing products or services by introducing new methods, ideas or products.

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RE Action PlanThe specific actions that provide the most effective results should take one of two forms, viz. (i) (ii) Direct actions to create or establish the necessary institutional arrangements; and Supporting measures to encourage and nurture the growth and development of the RE businesses.

THRUST 1: Introduce Appropriate Regulatory Framework Direct Actions Introduce RE Law Details The RE Law must: (1) Create a price (i.e. FiT) setting mechanism anchored on economic principles of efficiency and full-cost recovery, where negotiations between parties are neither necessary nor allowed; and different levels of FiT and degression rates for different RE technologies; with periodical review. (2) Set up the RE fund and specifying the contribution obligations of consumers, based on electricity consumed, as the more one consumes the more one should be responsible for the pollution emitted by conventional generators; (3) Oblige the power utilities (grid operators or distributors) to interconnect with priority access for transmission and distribution, on the basis of shallow connection charging; and (4) Standardise the REPPA terms to avoid negotiation. The critical success factors for this Thrust are: (1) Access to the grid must be guaranteed. Utilities must be legally obliged to accept all electricity generated by RE private producers; (2) Tariffs for RE (FiT) must be high enough to produce a return on investment without causing excessive profiteering; (3) Tariffs for RE (FiT) must be fixed (contract - REPPA) for a long enough period to give certainty and provide businesses with the security for market development and project financing; (4) There must be a "degression for the FiT, to promote cost reduction to achieve grid parity; (5) Adequate fund is created to pay for the incremental tariff cost (between higher FiT and the displaced electricity cost) and guarantee the payment for the whole contract period; the size of the fund will significantly determine the amount of RE capacity (limit) that can be generated.

THRUST 2: Introduce Conducive Stimulus Package for RE Businesses Direct Actions Create RE lending evaluation process Details Creation of a standard evaluation process that financial institutions can adopt would enable the provision of working capital to RE producers in a timely and appropriate fashion. This process can be developed by suitably identified local banks whose designated RE financing teams can be properly trained. This process can then be disseminated to other banks. Specifically these banks would have RE loan targets to be met over a 5 year period. Existing fiscal incentives should be continued, but their usefulness should be periodically evaluated after the RE Law (Thrust 1) has been brought into force. Within 10 years, these fiscal incentives should be permanently discontinued.

Continue with current fiscal incentives

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THRUST 2: Introduce Conducive Stimulus Package for RE Businesses Direct Actions Special incentives for using local R&D tech. Details For a period of 10 years, firms that adopt and use locally created or developed R&D for RE should be granted special fiscal reliefs by the Government, namely: (1) Group tax relief so losses in one subsidiary can be used to offset the profits in another; and (2) Double deduction of the costs of the local innovation or R&D in RE technology used; This is to stimulate the innovation system to produce local RE technology by creating a demand for such technology. Encouraging the use of local content must also include the encouragement of the use of local service providers. Therefore: 1. To encourage the use of local content in manufacturing of RE finished products and components, the incentives should be: (a) For domestic manufacturers: the provision of double deduction of the costs of local content if the local content is in excess of 50% of the finished product; (b) For foreign manufacturers investing in Malaysia: the provision of either an extension of their tax holiday by a further 2 years or if they have adopted an investment tax allowance, the grant of a 2 year tax holiday, once the local content has exceeded 50%. It is a one-time provision and nonextendable. 2. To encourage use of local services: firms who use in excess of 50% local RE service providers would be eligible for a waiver or refund of the service tax paid. To assist the SME sector to participate in this new market, Government should consider establishing a RE Centre; which is to help SMEs engage effectively with the relevant parties in the National RE Innovation System, focus on providing information to SMEs about RE technologies, opportunities and risks; assist them to participate in incentive programmes, and match their interests with possible partners or providers. Such a Centre should be under the purview of a suitably appointed Government agency with cooperation from SMIDEC as the appointed agency is better placed to advise and assist SMEs with RE-specific matters, as compared to SMIDEC which has overall responsibility for all sectors in which SMEs are involved in and not the RE expertise. Government specifies respective RE contribution from the GLCs, and monitor the achievement. The proposed RE contribution are to be related to the GLCs core businesses or by-products. Government should unleash the natural asset found in the significant number of MNCs that are not only environmentally conscious (such as IKEA, INTEL, Western Digital, Daimler and many others) but have long standing relationships with local suppliers, by encouraging MNCs to engage in RE generation for themselves and/or to exert their positive influence on local suppliers to encourage them to do likewise. To do so, a suitably appointed Government agency is to engage with MNCs to discuss ways by which they can help and what Government can offer as incentives; after which proper and effective incentives can then be formulated.

Local content incentives

Market entry for SMEs via SME RE Centre

RE Contribution by GLCs

Involving MNCs

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THRUST 3: Intensify Human Capital Development Direct Actions Financial incentives for technical and tertiary education in RE (1) (2) (3) Details Incorporate RE subject as modules or short courses in technical and tertiary curricula; Develop quality RE training institutes and Centre of Excellence (Thrust 4); Provide a technical training subsidy of the fees payable to centres accredited by the Department of Skills Development under the National Skills Development Act 2006 for RE approved courses; Provide a fiscal relief for individuals who undertake tertiary education in RE approved courses with local universities (both private and public).

(4)

THRUST 4: Enhance RE Research and Development Direct Actions Develop and implement the RE R&D Action Plan Details The key features of the R&D Action Plan are:Key Features Demand articulation Detail explanation Demand articulation defines the problem to be solved by the research, identification of the technology, market availability and the objectives to be realised. Sunset clause: 5 years. Provide market information so firms will be able to identify market potential of research areas. Enhance the Brain Gain Programme and permit the importation of foreign skilled workers (i.e. knowledge workers) to address the immediate shortage. Encourage local individuals to undertake post-graduate courses via the incentive programme (in Thrust 3). Build an RE research lab (Centre of Excellence) which the research cooperatives can use. Provide funds and continue with the current R&D fiscal incentives. Design an effective institutional framework, where the joint venture of public and private sectors is reflected in a cooperative research centre, with these features: (i) Close interaction between researchers and users of research; (ii) Industry contribution to the centres education programmes to produce industry-ready graduates; and (iii) As a place where higher degree programmes can be undertaken. Outcomes identified, and become a performance obligation of recipient of funds. A proper monitoring and evaluation mechanism that is fair, transparent and accountable is created; without there being any risk of bias or a conflict of interests. Clear and transparent rules for awarding funds to bidders, avoidance of conflicts of interests, proper and legally binding undertakings to preserve intellectual property of bidders; accountability process and grievance mechanism. Introduce a feed-in-tariff law with the specified degression which will encourage technological innovation to reduce the RE technology cost. Clearly identifying the roles and responsibilities of the parties and their accountability.

Market information Resources Availability of skilled people

Resources Facilities Resources Financial Institutional features

Feed-in-Tariff Law Roles and Responsibilities

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THRUST 5: Design and Implement an RE Advocacy Programme Direct Actions Design and Implement the Advocacy Programme Details Take into account (a) The target audience, (b) The timing of the programme, and (c) The message to be given. This requires that the Advocacy Programme has these key features:Key Features Specifying champions within and outside KTAK Methods to use all media and the new media Indentify all stakeholders Sufficient flexibility Periodic monitoring & evaluation Detailed explanation These champions are people who believe in the new RE Policy and are the spokesperson on all matters relating to the RE Policy. Their enthusiasm can be harnessed to secure other supporters. A proper media usage plan is needed to maximise the reach of the message to all stakeholders. This way the cost of face to face meetings can be avoided completely. All stakeholders should be identified (not just be category but by name if possible). The programme must be sufficiently flexible to adapt to changes in the social, business, economic and political climate of the country. Periodic monitoring and evaluation of the results produced by the programme is necessary in order to continue, change or revise the detailed activities of the Advocacy Programme.

The detailed report provides for the prioritisation of the main actions. The full scope of the action plan should be implemented within 2 months after the RE Law is passed. The estimated direct cost of implementing the RE Action Plan over a 5 year period using available data is RM 1.5 billion (this does not include the amount to be contributed to the RE Fund and the cost of indirect incentives).

RE Targets and Success Indicators

As the RE Policy is a new and forward looking policy, it is important and necessary that evaluation be done periodically, to empirically ascertain whether these actions are bearing fruit or require change mid-stream, and by which the outcomes of the Policy Objectives be monitored and realised. Accordingly evaluation criteria have been drawn up for each Thrust, and planned base line assessments are to be undertaken to provide the basis for future evaluation. Details of the criteria are set out in Chapter 8.

Year Ending 2011 2015 2020 2030 2050

Cum. Total RE (MW) 217 975 2,065 3,484 11,544

Share of RE Capacity 1% 6% 10% 13% 34%

Annual RE Generation (GWh) 1,228 5,374 11,227 16,512 25,579

RE Mix 1% 5% 9% 10% 13%

In conclusion this RE Policy is necessary for the development and growth of the RE businesses in Malaysia whilst at the same time reducing our environmental damage by the continued burning of fossil fuels in electricity generation. The old ways of doing things no longer applies, and the country must move in a direction which is more progressive. The Action Plan shows that the policy objectives can be achieved provided that the RE Law and

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Feed-in Tariff (FiT) which is supported by the RE Fund are introduced as these are the foundations on which the actions for the other thrusts are based or rely on.

The Lessons ......................................................................................................................19 Actions to be Taken ...........................................................................................................20 Summary ...........................................................................................................................20

Reason 3: To Provide Focus for a New Growth Industry ................................................. 31 Reason 4: To Recognise the Importance of the Environment as an Economic Growth Contributor ............................................................................................................ 32Spurring Innovation and RE Take-up .................................................................................33

Incorporate RE in Technical and Tertiary Curricula ...........................................................69 Development of Training Institutes and Centre of Excellence............................................69 Provision of a Subsidy and Fiscal Reliefs ..........................................................................69 Additional Measure ............................................................................................................70

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1.

INTRODUCTION

Drawing on the lessons learnt over the past 8 years, this report identifies the need and rationale for a convergence of energy, industrial growth, environmental, and information dissemination policies and proposes a new and forward-looking Renewable Energy (RE) Policy. The Report is structured as follows: Chapter 2 Key Facts Sets out the chronology of the introduction and development of RE in Malaysia and the key facts gleaned from the various RE programmes. Chapter 3 Key Issues Affecting RE Identifies the key issues and lessons that can be drawn from the facts. Chapter 4 Need for RE Policy and Action Plan Develops the rationale for and objectives of a convergent RE policy, drawing on the lessons and key issues set out in Chapter 3. Chapter 5 The RE Resources and Smart Targets Identify and analyse the technical potential of renewable energy resources and identify the SMART targets for the renewable energy. Chapter 6 The Renewable Energy Policy Sets out the RE Policy vision, objectives and mission (strategic thrusts). Chapter 7 RE Action Plan: Implementation Approach Details the implementation actions under each strategic thrust towards achieving the policy objectives. Chapter 8 Evaluation Criteria and Success Indicators Identifies the evaluation criteria to gauge the successes and achievements of the RE Policy and Action Plan. Chapter 9 Conclusion Concludes by showing the relationship of the various strategic thrusts to each other and the building blocks.

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2.

KEY FACTS

The design and formulation of a new and forward-looking RE Policy should be informed and guided by the relevant facts and lessons learnt from the recent history of renewable energy development in Malaysia.

2.1. Chronology of Events

Malaysias renewable energy (RE) policy and programmes have been in existence in one form or another for almost 30 years. Table 2.1 below chronologically summarises the policies and programmes introduced in Malaysia.

Table 2.1: Malaysian RE studies, policies and programmes

No. 1. 2.

Date 1980s 1999

Description of study, policy or programme Stand alone solar photovoltaic systems for electricity supply to rural communities and remote areas in Malaysia. Study on the development of a Strategy for Renewable Energy as the Fifth Fuel by KTKM (with the support of DANCED). This study assessed the RE potential in Malaysia and recommended the legal, regulatory and financial framework to encourage the utilisation of renewable resources. Prime Minister announced at the World Renewable Energy Congress in Kuala Lumpur that RE is the national fifth fuel. RE utilisation as fifth fuel incorporated into the 8 Malaysia Plan, which identified the various tools to promote greater utilisation of RE (namely demonstration projects, commercialisation of research findings, extension of financial and fiscal incentives). Small Renewable Energy Power (SREP) Program announced. The SREP Program encourages the production of RE by small power generation plants by allowing these producers to sell electricity generated to electricity distributors or retailers, such as TNB. SCORE set up with following members EPU, KPPK, KPKT, MPOB, SIRIM, JAS, TNB, SESB, BCSDM, ST & PTM The SCORE secretariat which also functions as a one-stop centre for the SREP Programme was set up. ST acts as the SCORE secretariat. Biomass-based power generating companies were given various fiscal incentives by the Government as identified in the Budget 2001. Biogen Full Scale Model (Biogen FSM) Demonstration Project was initiated SREP Guidelines for the initial phase issued by the Special Approval Committee SREP Programme. Prices for electricity generated using RE and sold to TNB was to be negotiated on a willing buyer-willing seller and take and pay basis, and documented in a REPPA. REPPA terms were similarly open to negotiation. 9 Malaysia Plan states that the sources of fuel will be diversified through greater utilisation of renewable energy. A market-based approach will be promoted to ensure efficient allocation of resources. Emphasis will be given to further reduce the dependency on petroleum products by increasing the use of alternative fuelsth th

3. 4.

1999 April 2001

5.

May 2001

6. 7. 8. 9. 10. 11.

2001 2001 2001 2002 April 2002 2002

12.

March 2006

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No. 13. 14. 15. 16.

Date July 2005 2006 July 2006 August 2007

Description of study, policy or programme MBIPV Programme launched to promote use of PV technology in buildings. It is a 5 year programme that expires in 2010. Study on SREP Programme and RE development in Malaysia undertaken by DANIDA Increase of RE price to RM0.19/kWh for biomass and biogas Increase of RE price to RM0.21.kWh for biomass and biogas3 3

The outputs of the various studies conducted are summarized in the table below:No. 1. Date of study 1999 Description of Study Study on the development of a Strategy for Renewable Energy as the Fifth Fuel by KTKM (with the support of DANCED). Key Outputs of Study (i) Identification of the potential for renewable energy from palm oil biomass wastes and effluents;

(ii)

2.

2006

Study on SREP Programme and RE development in Malaysia undertaken by DANIDA

The conceptualisation of the SREP programme with the expectation that the palm oil mill industry would be a key participant. Identified the main barriers to implementation of SREP projects, namely: 1) 2) 3) 4) Tariff not meeting market IRR expectations; Lack of long term fuel supply; Lack of financing; and Certain provisions in the REPPA that were unacceptable to SREP developers.

2.2. Status of RE Developments (2001 2008)

The period 2001 to 2008 spans two Malaysia Plans, i.e. the 8 and 9 Malaysia Plans, which saw the introduction of three programmes the SREP programme, the Biogen Full Scale Model (Biogen FSM) Demonstration Project and the MBIPV programme. The main outcomes over the period 2001 to 2008 (until September) are summarised below: 1. 2. 3. 50 SREP projects were approved by SCORE with a total generation capacity of 288 MW; 40% of SCORE approved SREP projects have been cancelled; 24% of SCORE approved SREP projects have been issued with licences;th th

See TNBs 2008 Annual Report at p. 68

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4. 5. 6. 7. 8.

36% of SCORE approved SREP projects cannot commence because licences have yet to be issued; For the first 8 years only 13 MW of RE generation capacity has been connected to the electricity grid; and In 2009, two Biogen FSM Demonstration Projects will be commissioned (i.e. the MHES Asias 13 MW and the FELDA Serting 500 kW power plant). There are 700 MW of off-grid electricity capacity primarily produced by private palm oil millers; About 1 MW of cumulative grid-connected PV installations in more than 100 buildings throughout Malaysia (mostly in Klang Valley).

As at September 2008, 13 MW RE power generations have been generated and connected to the grid. It is expected that by 2010 the generating capacity of SREP projects will reach 65.75 MW.

2.2.1. SREP Programme

NatureThe SREP Programme is a fully private sector funded initiative. Private sector participants have to meet their own funding needs via the use of internally generated funds or borrowings from commercial financial institutions. Under the SREP Programme, small power generation plants (limited to not more than 10 MW capacity) which utilise RE resources are permitted to sell (export) electricity to the utility company through the distribution grid system (usually at 11 kV). However all SREP Program projects must be submitted for approval by SCORE. SCORE mostly meets twice a year, and if a project is not considered at the first session it must wait around 6 months before it has another opportunity to be considered for approval by SCORE.

Technologies and Fuel Supply

The most popular technologies proposed under the SREP programme were biomass (using palm oil empty fruit bunches), biogas (from palm oil mills effluent), mini-hydro and municipal solid waste. The wider use of solar PV has recently gained prominence due to the implementation of the MBIPV programme (but generally not considered as SREP). Palm oil mills were considered inefficient biomass power plants because of the disproportionate RE input-output ratio of the existing mill technology, i.e. a disproportionately large volume of EFB has to be burnt to produce a given quantity of energy. Thus mills need to upgrade their plants to realise the full benefit of biomass. Furthermore for those technologies that rely on a fuel source such as EFB, rice husk, wood residue or POME, obtaining reliable fuel supply is a key factor to project viability.

Example: Rice husk and wood residue as fuel Proposals to construct RE plants using wood residues and rice husk as fuel were received and approved by SCORE. Notwithstanding the approval, these proposals did not progress any further because (as noted by industry observers), the proposed capacity of 10MW for the rice husk power project was too ambitious and (as realised by the project proponents themselves) it was difficult and costly to collect the required quantity of fuel (i.e. rice husk and wood residue) to make the project feasible.

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It was observed that suppliers of EFBs (i.e. the fuel for biomass power plants), upon recognising the economic value of an essential input to biomass power generation, could and in fact did exercise its market power by introducing economic terms and conditions (where none existed 4 before) for the supply of EFB. Evidence of such behaviour is documented in the 2006 DANIDA Study which highlighted the difficulties faced by RE plant operators in obtaining long term biomass fuel supply agreements. The duration of most EFB supply agreements was no more than 3 years. This had the direct effect of reducing the viability of the RE project as the buyer of energy (i.e. the utility) could not be assured of on-going long term supply given that the RE plant itself is dependent on EFB fuel supply agreements of relatively short duration (compared to the REPPA agreements for a longer period of time).

Energy PricesThe SREP Guidelines state that the price of electricity generated using RE is to be agreed by the relevant parties through negotiations on a willing buyer-willing seller basis. This means that the regulator (ST) or the Government will not set the energy price that the utility must pay to the RE power producer. Furthermore the price for electricity generated using RE according to the SREP Guidelines is on a take and pay basis. The utility company will only have to pay the RE power producer if the utility actually takes the electricity generated. Hence if the utility does not take any electricity in a given month, then the RE power producer does not earn any revenue in that month. Despite the SREP Guidelines stating that the price of RE electricity is to be negotiated, the price is evidently declared to be between 14 sen/kWh and 17 sen/kWh in the SREP Application Form 1/2002. The problems with the RE price levels declared in the SREP Application Form 1/2002 are: (a) (b) They did not meet the RE project proponents or the markets expected internal 5 rate of return (IRR) ; and They did not reflect the full cost of RE supply.

These problems were not mitigated when the level of RE price (for biomass and biogas power only) was revised upwards. The price increase was seen to be arbitrary because it was made without thorough economic costing studies. Furthermore, it created a market perception of Government picking winners i.e. preferring biomass and biogas as RE sources for electricity generation. The RE price of both biomass and biogas generated power has been revised twice recently (see Table 2.2 below):

In July 2006, KTAK increased the price to RM0.19/kWh following the 12% increase in the retail tariff for conventional power in mid 2006; and In August 2007, the price was raised to RM0.21/kWh by the Minister following his direct 6 discussions with TNB .Table 2.2: Summary of RE prices for various RE sources (Malaysia) RE prices RM0.17/kWh RM0.19/kWh (July 2006) RM0.21/kWh (Aug 2007) Biomass X X X Biogas X X X Mini-hydro X Solar PV -

In economics, an essential input is one for which demand is price-inelastic. Buyers of an essential input have very limited recourse to lower their demand significantly when a seller increases the price of that input. 5 See the 2006 DANIDA Report at pages 12 and 15 6 It is understood that the direct intervention by the then Minister was necessary and resulted in agreement by TNB that such an increase was necessary in fulfilment of their corporate social responsibility.

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REPPAFor the legal relationship between the RE power producer and the utility to exist a REPPA has to be entered. This requires negotiations between the utility company and the RE power producer because there is no standard REPPA agreement mandated by the relevant authority or law. As a result, REPPAs were developed using the PPAs between the conventional IPPs and the utility company as a precedent. They contained provisions that were not suitable or appropriate for RE power supply.

Examples of inappropriate or unsuitable clauses: (i) (ii) Performance provisions (i.e. facilities must deliver at the specified annual capacity factor calculated as an annual moving average), Penalty provisions (i.e. RE producers can be penalized 1 sen per kWh for every 2% shortfall in annual capacity factor, except for the first six months of billing when the project is still under testing stage), or Saving sharing provisions (i.e. where RE developers were to pay TNB, 50% of any savings accrued from CAPEX or tax reduction which deviates from the formers original expectations when they submitted their financial models to TNB).

(iii)

In negotiating the terms and conditions of a REPPA, RE project proponents are confronted with time and resource constraints and a single buyer. Issues related to these are:

(a)

Time and resource constraints Most RE power producers were small players who neither have the resources or capacity to negotiate for acceptable terms and conditions. Furthermore, the fiscal incentives for a RE project are subject to the condition that the project is implemented within 12 months. This has an unintended effect on the negotiations between RE power producers and the better-resourced utility for whom the time taken to reach an agreement is not a constraint. The combination of limited resources and time increased the pressure on RE power producers to capitulate and agree to terms favourable to the utility.

(b)

Single buyer The existence of a single buyer (i.e. the utility company) creates an unequal bargaining position, especially if the utility exercises its monopsony power to seek terms that are 7 more favourable to itself or more onerous to the RE power producer . This has the effect of pressuring the RE power producer to agree to terms that it may not usually accept. The Ministry of Energy, Water and Communications intervened in 2007 to simplify and standardise the REPPA by removing some of the inappropriate and unsuitable clauses. However the standardised REPPA only applies to RE projects of up to 2 MW capacities. Proponents of more than 2 MW projects still faced the problem of having to negotiate the terms of REPPA with the utility.

Notes: In fact the DANIDA Report found/identified that the REPPA was overly unfavourable for RE project developers.

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InterconnectionThe cost to interconnect the RE power plant to the grid (including the cost of strengthening the system) is, according to the SREP Guidelines, to be borne by the RE project proponent and not the utility company.

Participants ExpectationThe expectations of interested participants in the SREP Programme can be summarised as follows: (a) (b) (c) A pay-back period of between 3 to 5 years (especially by some palm oil millers ); A high internal rate of return; and The SREP Program is not commercially attractive given the availability of alternative 10 incentives in the form of CDM .9 8

Unless such expectations are met or addressed, they can undermine the success of a policy or program. It is only in 2007 when the RE price was increased to RM0.21/kWh did an improved incentive emerge to counter-balance the incentive in the CDM programme (only for biogas) or meet the expectations.

Progress of SREP Projects

Several RE projects approved between the years 2007 to 2008 have made significant progress. These projects will supply a total of 65.75 MW when they are connected to the electricity grid by the end of 2010. It is worth noting that these projects have progressed over a period during which changes were made to the key elements of the SREP Programme namely an increase in the price of electricity sold to the utility by RE producers, and the standardisation of REPPA to reduce the negotiation time period (or the need to even negotiate) for RE capacity below 2 MW. These changes addressed the two factors that were found by the 2006 study to have impeded the implementation of SREP approved projects.

2.2.2. Biogen Project

The Biogen Full Scale Model (Biogen FSM) Demonstration Project was initiated in 2002. Its main aim is to catalyse the development of RE projects through effective demonstration of the technoeconomic viability of biomass and biogas grid connected power generation projects, as well as through the provision of soft-loans to approved projects. To date, only two full-scale model projects have been implemented and scheduled for commission in early 2009 (some 7 years after the commencement of the Biogen FSM Demonstration Project), namely:

The 3-5 year payback period is a usual palm oil mill industry norm. Thus any period longer than that runs contrary to their usual investment return horizons, thus making it a difficult to convince these palm oil millers to participate. 9 Palm Oil Millers are used to high returns of their investments and a payback period of their investment of as low as 2 to 3 years. This provides for a high IRR. This acts as a disincentive for them to venture into the RE power generation, particularly when the payback period for their investment is about 10 years (from biomass fired SREP projects). 10 CDMs gave the palm oil millers adequate returns for merely flaring the methane rather than generating power.

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Despite the initial interests of participants in the Biogen FSM Demonstration Project, many withdrew from it citing the lack of adequate or sufficient returns on investments. Furthermore project proponents were discouraged when faced with financial and other impediments such as (a) (b) (c) Significant delays in approval of borrowings from local financial institutions; The treatment of project proponents as independent power producers akin to the existing IPPs in the conventional energy generation market; and Loan conditions that disbursement occurs when a plant is 80% complete.

2.2.3. MBIPV Project

The main goal of MBIPV Project is to reduce the long-term cost of solar photovoltaic technology through the development of a sustainable and widespread local market. The implementation of the MBIPV project is from 2005 to 2010, with the immediate objectives of increasing the capacity of PV technology applications in buildings by 330% and reducing the technology unit cost by 20% from the baselines. Through the Suria 1000 programme, the MBIPV Project provides grants to homeowners and companies to partially finance the capital and installation costs of a PV system. These grants are awarded through a bidding system. The level of financial assistance provided in the early phases of the programme was higher than that provided in the later phases. In all phases of the programme, successful bidders were the ones who were willing to contribute more of their own money to finance the purchase and installation of a solar PV system. Income from sale of electricity to the distribution grid is based on a net-metering scheme (in credit basis where the price for PV electricity is equivalent to the price of purchased electricity). The installed capacity of a PV system for a residential home is typically between 4 kW to 10 kW. The following facts are noteworthy: (a) Over the last 2 years, the cost of a PV system (on average) has dropped from 31,000 RM/kW to 26,000 RM/kW. All other things being equal, consumers may have responded to the cheaper cost by increasing the quantity demanded of PV systems; (b) Despite the lower level of financial assistance provided, the bidding for such assistance became more competitive, which reflects: (i) (ii) (iii) The objectivity of both the bidding process and selection criteria; The willingness of consumers to bear a higher portion of the finances required to purchase and install a PV system; and Environmentally friendly (green) technology is getting positive attention from the consumers.

The success of the MBIPV programme in eliciting the take-up of PV technology provides important lessons for the formulation of a forward-looking RE Policy in Malaysia.

2.3. Fiscal Incentives

The Government has introduced fiscal incentives to stimulate interests in the RE sector since 2000. These include:

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The grant of pioneer status with tax exemption of 100% of statutory income, and an 11 extension of the pioneer status from 5 years to 10 years ; Investment tax allowance of 100% on qualifying capital expenditures incurred within a 5year period, with the allowance offset against 100% of statutory income for each year of 12 assessment ; and Import duty and sales tax exemptions.

All of these fiscal incentives are provided with the condition of an expiry date. This requires the incentive programme to be evaluated and either extended or withdrawn.

11 12

Note: This is an increase from the original exemption of 70% of statutory income. Note: This is an increase from 60% of the qualifying capital expenditure.nd th

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3.

KEY ISSUES AFFECTING RE

Introducing a new policy requires clear identification and definition of the issues that are being addressed, otherwise the policy may be misdirected or fail. The key issues and lessons are summarised in Table 3.1 below and elaborated in sub-chapters 3.2 et seq.

Table 3.1: Summary of key issues and lessons Issues (1) Market failure exists: Lessons Market failure will be perpetuated unless the causes of such failure, viz. unequal bargaining position of the utility and RE project proponents, significant transaction costs in terms of the time needed to conclude a REPPA, and the monospony power of the utility to agree to the requests of the RE project proponent, are properly addressed.

The RE market fails due to misuse of monopsony power and information asymmetries; the RE market is also constrained by financial and technological factors. (2) Constraints:

Inherent factors that constrain the performance of the market. (3) Arbitrary price setting:

The market should not be relied upon solely to achieve the intended outcome (increase in RE power generation); steps should be taken to ameliorate the economic, financial and technological constraints that are impeding market performance. RE prices must be based on sound economic principles and allow for full cost recovery. Anything less than full cost recovery (or efficient prices) will affect the viability of the RE project. The predicament can be addressed by the introduction of a mechanism for sharing the cost of RE amongst all members of society, as environmental improvement is a non-excludable public good.

RE prices set arbitrarily. (4) Tensions & trade-offs:

The predicament of expecting that the utility will bear the higher costs of RE power (due to the higher RE price). (5) Absence of Regulatory Framework:

Market failure compounded by absence of a proper regulatory framework, which prevents proper and legal action from being taken. (6) Poor governance:

Regulatory frameworks provide the necessary foundation for achieving the desired outcome, and it sends a strong signal to the market of the governments commitment. The existing ESA is inadequate, inappropriate and insufficient to be used as the legal basis to support RE Businesses growth.

Poor governance affects the participation of stakeholders and legitimacy of the action. (7) Limited Oversight: of

Governance can be strengthened and improved through the introduction of the regulatory framework where governance principles are embedded.

Oversight and implemented function need to be in separate organisations for improved accountability;

No concerted oversight implementation problems. (8)

Lack of institutional measures:

Information asymmetry needs to be overcome through proper information dissemination, advocacy and awareness actions. Access to and the type of information should be made available expeditiously in order to assist in the private firms decision making process with regards to investing in RE.

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Therefore a more robust and effective RE Policy drawn from these lessons is necessary to address these key issues.

3.1. Existence of Market Failure

In a market economy, such as the one in Malaysia, the questions of what, how and for whom resources are to be allocated are primarily resolved through the interplay of supply (by producers of goods and services) and demand (by consumers). A market works well in providing the sorts of goods and services that people wish to buy and can do so at least cost, so long as certain conditions are present. The most important of these are as follows: There are no significant externalities. An externality is a significant cost of production (or consumption) that is not fully borne by the producer (or consumer). E.g. a producer who does not bear the costs of pollution will over-produce the good that is the source of the pollution. Firms in the market face competition from other existing firms, from imports, as well as the threat of new firms entering the market. A single-seller (monopolist) is likely to exploit the absence of competitive threats (e.g. by selling an essential product at a higher than competitive price), whereas a single-buyer (monopsonist) is likely to behave opportunistically (e.g. to only do business with firms that accept terms and conditions that are favourable to the buyer). Adequate information about the quality and characteristics of goods and services is provided or made available to buyers at reasonable cost; and one party in a transaction does not know substantially more than the other party.

Where and when one or a combination of such conditions is not met in the real-world, a market failure occurs and Government can and should intervene to prevent resources from being allocated inefficiently.

3.1.1. Evidence of Market Failure

From the facts in Chapter 2 ante, the following evidence the existence of market failure, namely: (a) In the SREP Programme, leaving agreements to be reached between parties may allow the party with market power or more information to take advantage of its bargaining strength to the detriment of the other party. Examples are the very short term fuel (EFB) supply agreements or the long negotiation time for a REPPA. It is well-known that CO2 or GHG is emitted by the burning of fossil fuel. The costs of such pollutants (i.e. the externality) have yet to be taken into account in the production decisions and behaviour of the utility and IPPs. This may (and could) perpetuate the over-production of electricity using fossil fuel, especially when the cost of that input to conventional power producers is subsidised. Insofar as EFB is an essential source of fuel for some technology-specific RE producers, the supplier of EFBs could and in fact did exercise its market position and power to the detriment of the buyers of EFB. As a result, the RE producers who are dependent on EFB have not been able to secure long term supply contracts (of more than 3 years) with guaranteed availability, and they have to pay a price that is significantly higher than expected. An information asymmetry exits between RE project proponents and the utility (as the utility is more experienced in electricity supply and is able to justify the existence of certain clauses in a REPPA on technical grounds which cannot be rebutted by the RE project proponent). This together with the utility's monopsony power could compel RE project proponents to accept unfavourable terms and conditions.

(b)

(c)

(d)

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In Malaysia, the Governments role and involvement in the energy supply industry is well13 established and can be expected to continue for some time to come. The Government has to give due recognition to the conditions that cause market failure (such as misuse of market power, information asymmetries). The slow take up of SREP initiatives is evidence of market failure problems for which a proper regulatory framework is needed.

3.2. Existence of Constraints

In the current environment of the energy sector, there are economic, financial and technological constraints that may undermine any form of RE Policy unless they are addressed specifically, either in the formulation or implementation of RE Policy. These constraints are summarised below:

No. 1.

Type of constraint Economic (i)

Evidence of the constraint The existing tariffs act as a constraint on the part of the utility to agree to a higher energy purchase price, for the simple reason that no business will purchase an input to be sold at a lower price; Competing incentives exist in the market that make it, on a net benefit test, more favourable for businesses to utilise those competing incentives than participating in RE power generation; and Preference for the least-cost fuel option by policy makers.

(ii)

(iii) 2. 3. Financial Technological

Difficulties in obtaining commercial financing from local financial institutions by RE project proponents; (i) (ii) Requirement for interconnection and costs burden on the RE power producer; and Need to import RE technology.

These are elaborated below.

3.2.1. Economic Constraints

(i) Controlled and Low Electricity Tariffs

The average electricity tariffs are generally low despite the increases in June 2006 by 12% and again in July 2008 by 23% (average). Yet by March 2009 the average tariffs will be reduced by up to 5%. Notwithstanding the movement of tariffs over the past 3 years, a fundamental concern is that the tariffs are artificially low due to the fossil fuel subsidy the Government provides (directly or indirectly) and have not accounted the external costs. This means that the real costs of electricity is not passed to consumers, which perpetuates consumer expectations of low retail tariffs. This report takes as given the state of the current energy tariffs, and assumes that it is the intention of Government to slowly reduce, over time, the existing subsidies and also include the external costs. Therefore in such a situation the low tariffs act as a disincentive (or even a commercial hindrance) for the utility to agree to a higher purchase price for RE. The utility being a public listed company with diverse shareholders owe those shareholders an obligation to meet financial targets and profit forecasts, which it would not be able to do by buying RE at a price higher than the permitted retail energy tariffs. Consequently there is a need for the policy to manage two opposite demands namely:

13

Such as setting low tariffs for conventional energy and subsiding the costs of fuel inputs.nd th

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(a) (b)

The requirement for an efficient RE price that provides the necessary incentive for firms to enter the RE market; and The need for the utility to meet its financial responsibilities to its shareholders. This means that the financial burden that an efficient RE price places on the utility needs to be managed by alternative means.

(ii)

Competing Incentives

The existence of different market choices can create competing incentives and private firms will choose those which are the lowest cost to implement or produce the greatest benefit to them; i.e. a net benefit test. The competing market choices are the CDM, improve energy efficiency or participate in RE generation. Based on a net-benefit test, firms will choose an approach that maximises the benefit to them at the lowest cost.

(iii)

Least Cost Option

RE programmes or projects faced significant economic impediment because the economics of conventional energy using fossil fuels is less costly than using renewable energy sources. With such an economic situation, it is not surprising that interests in RE projects are low. However the promotion of coal as a source of fuel for power generation by policy makers, strengthens the marginalisation of RE from the mainstream, because of the signals that the promotion of coal sends to businesses.

3.2.2. Financial Constraints

Since the approach of the current SREP programme is one which relies on private capital, funding is a significant necessity. A review of the RE projects reveals that RE project proponents experienced difficulties in securing funding from local financial institutions. These range from a lack of knowledge or expertise amongst financial institutions to evaluate RE projects that seek funding, imposition of terms and conditions that treat RE funding as a conventional loan (and not similar to non-recourse project financing as adopted with IPP funding), greater risk mitigation measures to reduce the exposure of the financial institution to the risk of non-payment or a default. The latter resulted in reduced duration of the loan tenure to approximately 8 years, imposition of stringent conditions for drawdown particularly after an advanced stage of construction and higher interests rates. As a consequence the availability of capital to fund RE projects is sorely lacking, and this adds as a disincentive to private enterprise from developing an RE project. Only those with better access to capital (either ready capital via internally generated funds or with other assets to provide security to financial institutions) would be able to overcome the financial difficulties. This reduces the available pool of private sector participants and accordingly has a knock-on effect on the number of RE plants that are built and commissioned.

3.2.3. Technological Constraints

There are two technological constraints on the viability of RE projects. Firstly the need to interconnect and direct interconnection costs and associated costs of strengthening of the system which are to be borne solely by the RE producer, and secondly the technology cost for efficient and advanced RE technologies.

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(i)

Interconnect

The cost to interconnect the RE power plant to the grid including strengthening of the system is, according to the SREP Guidelines, to be borne by the RE project proponent and not by the utility company. Such a requirement adds to the capital costs burden of RE project proponents, thereby increasing the capital requirement and affecting the financial viability of the RE project. If such costs are to be borne by the RE power producer then such costs must be reflected in the RE prices, so that the costs can be recovered. This would make the RE price an efficient price. However because the RE prices were set without any proper study they did not reflect such costs, with the effect of reducing the viability of the RE projects.

(ii)

RE Technology

This burden is particularly significant because of the technology costs in RE projects. Advanced RE technology (e.g. modern and efficient gasification boilers) that can be imported are both very expensive and subject to significant technology costs (e.g. royalty payments for use of the intellectual property within the RE technology). Such cost of technology adds to the capital burden of firms as a whole. This in turn creates a feedback loop for higher RE tariffs. Consequently only firms with sufficient financial means can participate, but more significantly this has the potential to exclude small and medium, but equally if not more entrepreneurial enterprises, from entering this market.

Example: Technology Costs One of the approved RE power plant utilises a gasifier technology (referred to as envirocycler) licensed from a Canadian patent. This technology would result in greater efficiency of energy conversion as compared to the conventional direct combustion of EFB. The capital cost of the gasifier amounted to RM14 million whilst the royalty payment amounted to 32% of the total project cost.

The existing constraints mean that any measures designed to implement the policy should address these constraints in a meaningful way without distorting the market (e.g. by providing subsidies). The opportunity is available for the proper management of these constraints in an effective and efficient manner, which enables the policy to be sustainable over the long term.

3.3. Arbitrary RE Price Setting

The original intention as expressed in the SREP Guidelines, was for the RE prices to be marketbased. However there were informal price settings by Government (see for example the SREP Application Form, and announcements increasing RE prices in 2006 and 2007). From the facts the prices for RE were not set pursuant to a proper pricing study, nor was there any evidence of the adoption of economic principles. RE prices were raised in 2006 and 2007 as an intuitive response to the raising of the retail tariffs and as a result of lobbying by the palm oil industry. It was done by the Minister brow beating the utility to accept the higher price which was applicable to biomass and biogas. This reflects three key issues: (a) (b) The lack of the application of economic principles in price setting so that the basis is transparent and clear; and The substitution of a principles-based approach for an individuals perception or understanding of the right price (i.e. arbitrary setting of RE prices without regard to efficiency of the price).nd th

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3.4. Business Tensions and Trade-offs

Existence of business tensions necessitates a trade-off, where the business must make a choice. In the case of RE in Malaysia, the demand on the utility (as the market for retail and distribution has not been liberalised) to fund RE by paying higher prices to RE power producers is the opposite to (thereby creating an extreme tension) with the demand on the same utility to improve its financial performance and the return on its assets. This financial improvement arises because (i) (ii) The utility is a publicly listed company, and Its majority shareholder is Khazanah Nasional (i.e. the Governments investment arm) 14 who has introduced the Rainbow Books in the GLC Transformation programme .

These tensions seek supremacy in the utility, and the result is that the utility as a public company will support the demand for financial improvement. Consequently there is little or no incentive for the utility to concede anything when dealing with RE power producers as it sees itself in a loselose situation. On the other hand the expectation of RE power producers especially those from the palm oil industry (i.e. biomass and biogas) of high IRRs and short pay-back periods create a demand for higher RE prices. These demands have resulted in price changes, and other actions viewed as being taken against the utility or not in the utilitys interests but that of the palm oil industry. Yet it must be recognised that use of RE produces a public good i.e. improvement in the environmental condition through the reduction in CO2 equivalent emissions. In Malaysia, the total CO2 equivalent emissions for the year 2006 amounted to 169,829 GgCO2. The power sector is one of the major and largest contributors with 56,203 GgCO2 which accounted for 33% of the emissions. Whilst the various types of fossil fuels used in power generation contribute different amounts of GHG into the atmosphere, biomass energy is carbon-neutral, releasing the same amount of carbon dioxide as it absorbs, while wind and solar has zero emissions. One of the outcomes of RE is a public good, which is non-rivalrous and non-excludable (i.e. other members of society cannot be excluded from enjoying it, nor does ones consumption of it reduces its availability), mean that those who pay for this benefit cannot exclude other who do not pay (but who can still enjoy the good). Therefore the tensions and the dilemma that exist in the current situation arise because of: (i) (ii) (iii) The expectation of a high price for RE especially for biomass and biogas by the RE power producers; The need by the utility for RE prices to be as low as conventionally generated energy; The expectation that the associated costs of RE programme should be borne by someone other than the utility (because of the pressures of the GLC Transformation programme); and The outcome of RE power production is a non-rivalrous and non-excludable good.

(iv)

The approach adopted to date has been to use political will to persuade the utility to bear these costs; but such an approach limits the growth of RE power plants as this is totally devoid of any merit, principle or legitimacy of action. This leads to the question of who should be made to bear the costs.

14

Details of the GLC Transformation programme are available at http://www.pcg.gov.my/index.asp (accessed on 25 Feb 2009)

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Cost BearingPlacing the RE costs solely on the utilitys shoulder (as is the case to date) creates tremendous tensions for the utility especially as it has to meet its key performance indicators set under the GLC Transformation programme, its public company status and treated as part of the government. The result is that the utility will find ways to minimise their cost exposure. Alternatively if the RE producers bear the costs (i.e. being the difference between the actual cost to generate and the price they receive for selling it to the utility) they have no incentive to enter the market. If the cost burden is placed on the Government, it means an opportunity costs and competition amongst other programmes for funding. It must be recognised that Government revenue is not unlimited, and must be used efficiently and effectively. Therefore placing the RE cost burden on consumers be they households or businesses, is both an effective and efficient mechanism because: (1) (2) (3) It is a consumption based burden, since the more one consumes the higher the amount to be contributed; It implicitly recognises the polluter-pays principle; and The existing collection mechanism can be used thereby minimising transaction costs.

3.5. Lack of an Efficient Regulatory Framework

The applicable regulatory framework is inadequate to address the myriad issues pertaining to RE as a fifth fuel in electricity generation. For example the power to fix tariffs, under section 26 of the Electricity Supply Act (ESA), is in the hands of licensees with the proviso that such tariffs are to be approved by the Minister (not the regulator) before being applied. Accordingly it would be legal for a licensee to seek approval every year and to obtain a writ of mandamus compelling the Minister to decide (if the Minister does not do so). However it would be ultra vires to the Act for the Minister to fix tariffs for RE. Furthermore the ESA requires installations to have proper safety supervision undertaken by the resident engineer as prescribed in the Electricity Regulations; but is silent as to the rights of a power producer to demand interconnection of its power plant to the grid, nor is there any provision to deal with the risk of the grid operator behaving anti-competitively (since the grid is a natural monopoly and needs to be regulated as such). The lack of mandatory requirement to enable access and interconnection means, that any interconnection is being done purely voluntarily by the grid operator, via the use of contracts. Contracts supplement the deficiency in the current regulatory framework, but their ability is dependent on there being the possibility of regulatory intervention to avoid abuse of market power. Further network access prices are not applicable in Malaysia since the transmission and distribution charges in the form of network access prices or use of system charges are not levied by the utility. The only form of such charges is the expenses that TNB (as a licensee) incurs in providing a supply line to a person requiring the supply of electricity, which is not a network access price. Without a robust, effective and efficient regulatory framework that provides clear rules (and minimises discretionary powers) the default mechanism is to rely on regulatory negotiations, i.e. negotiations to achieve an outcome which is similar had the outcome been specified in regulations. This consumes time and effort of all parties and may not necessarily produce the desired results. An example of this is the price for RE generated electricity that was revised after 5 years. It arguably took that amount of time because the affected party was seeking other concessions from the political authority.

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The SREP programme evidenced that private capital will only be an effective means to introduce a new technology if there is a favourable and supportive regulatory environment and where sufficient and adequate return on investment exists. Without these elements, the market will not work to support the introduction and take up of new technology. Additionally RE developers were also required to obtain approvals from other agencies such as the Department of Environment (DOE) for environmental impact assessments, State Authorities for land conversion approvals, State Authorities for water abstraction rights and permissions (as in the case of mini-hydro), and planning permission from local authorities. These requirements are nevertheless applicable to all parties intending to generate power in Malaysia; and are not unique to RE power producers per se. However there is a compliance cost which needs to be managed or reduced; and an opportunity cost incurred because of administrative delays due to arguably a lack of awareness by the regulatory bodies of RE.

3.6. Governance Issues

Good governance is a system that is transparent, accountable, just and fair, participatory and responsive to peoples needs. Governance is important because it provides the means by which the institutional framework operates, clarifies the roles of interested parties and avoids or minimises conflicts of interests. Without proper governance institutional structures may lack legitimacy for long term sustainability. Institutions are of two types formal or informal. Formal institutions are set up within the ambit of legislation or regulations. Informal institutions exist within the ambit of administrative actions which may be sanctioned, recognised or supported by the state. It is now accepted that institutional systems may of themselves be the causes of sustainability problems and barriers to addressing policy problems. Systems that are not transparent or fully accountable are precisely those that are resilient, powerful and resistant to change.

3.6.1. The Roles and Responsibilities of SCORE

The creation of a special committee referred to as SCORE is of itself not an issue. The issue arises with the role that SCORE has over time created for itself (whether intentionally or otherwise), namely as an approving body for SREP projects. Members of SCORE includes the MPOB and the utility (TNB) and the presence of these interested parties in the decision making process creates the potential for conflicts of interests. Evidences of the possibility of such conflicts of interests are: (i) The setting of RE prices at RM0.21/kWh for biomass and biogas which directly benefits palm oil mills represented by MPOB; and (j) The standardisation of REPPA for under 2 MW RE plants which benefits TNB as TNB is still able to negotiate REPPAs for RE plants above 2 MW capacity. This allows TNB to exercise its monopsony power when it comes to such negotiations. Improving governance means avoiding situations where conflicts of interests may arise or where parties interested in the outcome of a decision are involved in the decision-making process. The inputs of both TNB and MPOB are valuable, yet the interplay of their respective vested interests may distort the decision-making process. MPOB and TNB can and should be required to make transparent submissions to a public consultation held under the aegis of SCORE, whilst allowing the decision maker to arrive at an independent decision that is beneficial to the country as a whole (not just to an industry segment or a particular corporation albeit a GLC).

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3.6.2. No OversightImplementation of the SREP Programme or RE Policy should be in the hands of a properly and legally constituted implementing agency. Yet SREP project approvals are made, not by ST (as the industry regulator) but, by SCORE, when there is in place guidelines for potential investors or firms to follow. Since all applications are submitted to SCORE, via ST, SCORE has descended into the realms of implementation (i.e. approving projects). The effect is that there is no institution that is performing an oversight role, nor is there any institution that can be held accountable to ensure that policy goals are achieved. The lack of an oversight body to ensure that policy targets are met or at least to hold the implementing agency accountable reduces the effectiveness of the governance framework because no one will take responsibility or can be held responsible.

3.6.3. Legitimacy of Action

The facts evidenced the direct involvement of the Minister in securing an increase of RE prices as well as in getting TNB to agree to standardisation of the terms of REPPA, albeit with limited applicability. Such positive outcomes must nevertheless be based on legitimate actions otherwise it may be open to question or challenge. Furthermore such action also evidences the lack of proper governance, since only with the addition of legitimacy, does power cease to be the brute exercise of will and becomes the rightful exercise of will. It also raises the possibility of capture by the very firms that the intervention is made necessary, for example government intervenes because of monopoly power (a market failure); yet the process of setting the price that can be charged by the monopolist is driven by the monopolist itself (hence capture), without serving the public interest, the intervention is now in the monopolists interests. Such legitimacy can be conferred by the introduction of appropriate legal measures.

3.7. Information Cost and Access

For any new technology to take root, having access to the appropriate information is essential. When firms do not have access to proper information, there is a greater likelihood of them relying on their own perception or using proxies to draw conclusions and make decisions. Access to information that facilitates proper decision making is also an essential element for the mobilisation of capital. Furthermore there is a cost to accessing and processing information for decision making, and this information costs makes it prohibitive for small RE projects to undertake the information gathering, processing and assessing on their own. There however has been little assistance in provision of relevant information to interested parties, with the result of there being decisions made largely on assumption basis.

Examples of decisions made based on general assumption: (a) Biomass plant of 10 MW relying on assumption that wood and rice husk for fuel are available, where in reality the collection and quantity of such fuel was insufficient or the 10 MW was too ambitious; Biomass plant using EFB where the EFB had to be purchased when it was believed it would be given away;

(b)

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Minimisation of information costs can provide a direct assistance to firms interested in entering or participating in RE projects.

3.7.1. Access to Information

Whilst a lot of data and information about renewable energy is available both locally and internationally, their accessibility is difficult, either because the information is not published on the internet, not readily available in a form suited for business decision making, or is classified as confidential or subject to secrecy laws. Without easy access to information, many firms or stakeholders would be unaware of RE prospects, specific systems designs, application and approval processes, and the benefits and risks of RE. This affects their decision making process as a whole. Consequently, potential developers would exercise a higher degree of caution in committing their financial and human capital to undertake RE projects.15

3.7.2. Structure of Information

The available information is not available in a single repository or in a format that is appropriate for the audience. The many participants (such as PTM, ST, KTAK, SCORE, EPU, etc.) create the risk that no one takes responsibility for providing such information. ST has published the SREP Guidelines, application forms, and process flowchart, but nothing else. PTMs Energy Information Bureau provides information about RE but it requires time to be digested for relevance to business people in deciding to allocate their capital to an RE project or to another venture.

3.8. Lessons Drawn from Key Issues

3.8.1. The LessonsThe value of the current RE policy is that it provides the real life evidence for the changes to be introduced. Without such a real life situation, many detractors of RE policy would raise the very arguments (i.e. let the market decide, Government should not intervene) that were tried but without success.

The lessons that can be drawn from the facts and evidence are: (1) (2) Relying solely on market forces, when clear constraints exist, will not produce the desired outcome. There is a need to acknowledge: (i) The requirement for the introduction of proper RE price setting actions (not arbitrarily set prices) and the applicable principles to produce an efficient RE price, and (ii) Its financial implication for both the utility and consumers. (3) The cost of RE should be shared by all members of society, because it is unreasonable to expect that the utility will agree to bear the higher costs of RE power (due to the higher

15

Note: Several studies have been carried out in Malaysia through bilateral international assistance programmes. Many seminars and conferences have been held.

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RE price) without there being an increased in tariffs. Since tariff revisions occur infrequently and are politically sensitive, imposition of a higher RE price without a consequential increase in tariffs creates a regulatory squeeze on the utility. There is a need to address this predicament. (4) The need for a proper regulatory framework equipped with the necessary tools and legitimacy to address specific market failures and constraints, whilst signalling a strong commitment by Government towards RE. Poor governance affects the participation of stakeholders and legitimacy of the action. Regulatory oversight and policy implementation should be undertaken by separate organisations that are both fully transparent and accountable. This separation provides an opportunity for proper monitoring of progress and to address problems early on. Information asymmetry needs to be addressed to minimise market failure. Access to and type of information should be made available expeditiously in order to assist in the private firms decision making process with regards to investing in RE.

(5) (6)

(7) (8)

3.8.2. Actions to be Taken

Based on the aforementioned lessons, the actions that need to be taken are: (1) Introduce a regulatory framework that addresses the following key points: (a) (b) (c) (d) (e) (f) (g) (2) (3) (4) (5) Market failure issues pertaining to RE plants including information asymmetry and the existing constraints; Provide certainty to investors; Minimise regulatory or political capture by interested parties; Setting of RE prices based on sound economic principles; Expressly exclude arbitrary price setting through the exercise of Ministerial power; Provide for society to contribute towards the cost of RE (via a contribution system based on consumption of energy); and Creation of a fund in which the contributions are to be paid into including the terms of operation and use of the fund.

Develop a cost sharing mechanism and determine payment obligations; Introduce a good governance system to ensure consistency of application; Introduce clarity of roles between the implementing agency and the agency tasked with oversight functions to ensure full accountability; and Disseminate relevant and pertinent information to firms intending to participate in the RE industry, to minimise information costs.

Details of the action items are explored in Chapter 7 post.

3.8.3. SummaryThe actions identified in 3.8.2 above together with the lessons are summarised in the table below:

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Lessons drawn from real-life situation (1) Inappropriate to rely solely on market forces, when clear constraints exist, will not produce the desired outcome; RE prices should not be set arbitrarily, but based on clear economic principles and to manage the financial implication for the utility;

Actions required Introduce a new regulatory framework to address market failure issues pertaining to RE plants and the constraints.

(2)

RE prices must be based on sound economic principles and be full cost recovery. Anything less than full cost recovery (or efficient prices) will affect the viability of the RE project. Therefore introduce a new regulatory framework that: (i) Empower the regulator; (ii) Sets the applicable principles for RE price setting based on sound economic principles of efficiency; (iii) Expressly exclude arbitrary price setting through the exercise of Ministerial power; (iv) Provide for the cost of RE to be borne by society at large (via a contribution system based on consumption of energy). For cost to be shared by society a mechanism needs to be provided in law that: (i) Determines the manner of calculating the contribution; (ii) Obliges a person to pay; and (iii) Identifies the terms of operation and use of the fund. This can only be done through the introduction of an appropriate statute.

(3)

The cost of RE should be shared by all members of society, because it is unreasonable to expect that the utility will agree to bear the higher costs of RE power (due to the higher RE price) without there being an increased in tariffs. Since tariff revisions occur infrequently and are politically sensitive, imposition of a higher RE price without a consequential increase in tariffs creates a regulatory squeeze on the utility. There is a need to address this predicament. The need for a proper regulatory framework

(4)

Develop the appropriate regulatory framework that is rulebased so as to provide certainty to investors and minimise regulatory or political capture by interested parties Prescribe a good governance system within the regulatory framework to ensure consistency of application. This provides certainty to investors. Introduce clarity of roles between the implementing agency and the agency tasked with oversight functions to ensure full accountability

(5)

Poor governance affects the participation of stakeholders and legitimacy of the action; Oversight and implementation function needs to be in separate organisations for accountability;

(6)

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Actions required Introduce a regulatory framework that address information asymmetry problems, such as by prescribing the terms and conditions of a REPPA without any limitation Disseminate relevant and pertinent information to firms intending to participate in the RE industry, to minimise information costs.

(8)

Access to and type of information should be made available expeditiously in order to assist in the private firms decision making process with regards to investing in RE.

A key action that needs to be undertaken is the introduction of a new regulatory framework to address the problems and constraints that RE has experienced.

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4.

NEED FOR RE POLICY & ACTION PLAN

A Renewable Energy Policy is essentially a policy for change, by sending a clear message to all stakeholders (including society at large) of the importance and necessity of sustainable development. Continuing the old ways is no longer a viable and sustainable option for Malaysia, and all stakeholders must take on a contributory role. A business-as-usual approach is no longer tenable. There must firstly be recognition and acceptance that any RE policy is a convergence of energy, industry, environmental, and information dissemination policies. Such a convergence provides both tremendous challenge and opportunity in its design. It must be further acknowledged that Government policy provides the market with proper signals which are translated into investment decisions by businesses. For example if Government were to introduce a policy on imposition of a carbon tax on firms which emit CO 2, then this signals to the firms to either exit the market, or to invest in CO 2 sequestration systems or improve their production process to minimise the CO2 emission to the permitted CO2 quantity if they wish to remain in the market. The choice of action in response to the signal sent by Government is left to the individual firm to select. Clear and robust government policy is necessary to push to overcome business inertia, which can act as an impediment to change. As a consequence the importance of policy to business decision cannot be understated.

There are six reasons for a Renewable Energy Policy: Reason 1 Reason 2 Reason 3 Reason 4 Reason 5 Reason 6 To address current market failure; To provide long term sustainability; To stimulate a new growth industry; To recognise the importance of the environment as an economic growth contributor; To develop human capital resources particularly in the field of R&D in RE technologies; and To improve the coherence of current policy.

4.1. Lessons learnt from Germany: World Leader in Renewable Energy Technology ApplicationsGermanys renewable energy programme begun with the 250 MW windmill prototype programme in 1986. In 1989, it introduced the 100 MW demonstration programme and subsidy, only to be increased to 250 MW two years later. In 1990, the government launched the 1,000 Roof PV Programme, but it upgraded the programme to the 100,000 solar roofs programme in 1999. In terms of RE pricing, Germany adopted the Electricity Feed-In Law in 1991, but replaced it with the Renewable Energy Sources Act (EEG) in 2000. The changes brought about by the EEG Law provided for different tariffs for different technologies, and in particular increasing the solar PV tariffs by 6 times as well as a declining tariff or degression (-5% p.a.) over a defined period (based

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on the premise that cost of production of new technologies such as wind and solar PV would come down as the market grows and more vendors participate16).

Figure 4.1: Electricity generation from RE sources among EU-27 Member States in 2006 shows Germanys clear leadership in terms of renewable electricity generation

The rise in electricity generation from renewable sources is significant after the introduction of the st new EEG Law in 1 April 2000 as shown in Figure 4.2 below.

Development of electricity generation from renewable energies in Germany, 1990 - 2007

The expansion of renewable energy sources in Germany has been an unprecedented success. Since the beginning of 2000, the share of total final energy consumption from RE has more than doubled. The German Government had previously set itself the target of generating 12.5% of

16

See, for example, Energy Information Administration (2005), Policies to promote non-hydro renewable energy in the United States and selected countries, U.S. Department of Energy.nd th

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gross electricity consumption from renewables by the year 2010. By 2007, this target had already been significantly exceeded, at 14%. Renewable energy sources in Germany, developments status in 2007: 8.6% of total final energy consumption (electricity, heat, fuel; 2006: 7.5%). 14.2% of gross electricity consumption (2006: 11.7%). 6.6% of final energy consumption for heat (2006: 5.8%). 7.6% of fuel consumption (2006: 6.3%). 6.7% of primary energy consumption (2006: 5.6%). Wind energy: Following a gross increase in installed capacity of 1,667 MW in 2007, a total of 22,247 MW was installed as per the end of 2007, and around 39.5 TWh of electricity produced. Bio-energy: More than 17.4 TWh was produced from solid, liquid and gaseous biomass (the total figure including biogenic waste, landfill gas and sewage gas was 23.8 TWh). Hydro-power: Installed capacity remained more or less constant where 20.7 TWh of electricity produced. Solar power: With an additional 1,100 MW of capacity built in 2007, Germany is the photovoltaic world champion, with 3.5 TWh of electricity produced. The installation of new solar thermal collector area has fallen but remains at a high level of around 940,000 m2 with a total installed area of 9.6 million m2. Geothermal: Germanys second geothermal power plant has begun operation in 2007.

4.1.1. Economic benefits from EEG Law

In recent years, RE has developed into a significant economic factor in Germany. Between 2003 and 2007, total turnover from RE sources increased from around 10 billion Euros to around 25 billion Euros, corresponding to an increase of 150% in relation to the year 2003. The level of total turnover in 2007 (25 billion Euros) is equivalent to the tax revenues of the federal state of BadenWuerttemberg in 2006 (around 24 billion Euros).

Figure 4.3: Total turnover from RE in Germany in 2007

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Renewable energies are a job creator for Germany. Their continuous expansion in 2007 helped to create or secure numerous jobs. It is estimated that nearly 250,000 jobs in Germany were attributable to the RE sector in 2007. This translates into an increase of around 55% compared with 2004 (approximately 160,000 jobs). At least 60% of the jobs are directly attributable to the effects of the EEG Law. This is supplemented by jobs associated with public and charitable funding to promote renewables, including public sector employees.

Figure 4.4: Job figures from RE in Germany (2004 2007)

4.1.2. Cost to Electricity Consumers

Electricity from renewable energy sources which is eligible for remuneration under the EEG Law (feed-in tariff) is still more expensive than that from conventional energy sources. To date, the resulting total costs have generally been calculated according to the following basic formula:

The feed-in tariff (FiT) paid to plant operators are published by the Association of German Network Operators in the form of an audited annual account. The electricity purchase costs avoided as a result of FiT can only be approximated, since these are trade secrets and there is no general database available. The cost of FiT which is shared among the electricity consumers (including the special provision for electricity intensive companies), is equivalent to just under 5% of the costs for one kWh of household electricity in 2007 (an average of 20.7 cents/kWh). In 2007, the cost of the FiT to an average household with an electricity consumption of 3,500 kWh per annum was around 3 Euros per month.

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4.1.3. Effects of RE on Electricity Prices

When assessing the economic effects of the promotion of RE by the EEG Law, as well as considering the market value of the FiT electricity, it is also necessary to take into account the impacts of electricity generation from RE on wholesale electricity market prices. The fact that priority is given to the feed-in of renewables would, in the short term, lead to a lowering of electricity prices on the wholesale market. The market price of electricity is determined by the most expensive power station still needed to satisfy the demand for electricity (merit order). Because priority is given to RE (via EEG Law), demand for conventional electricity is reduced. In accordance with the merit order, therefore, the most expensive power plants are no longer needed to meet the demand, and the market price falls accordingly. This effect is known as the merit order effect, as shown in Figure 4.6.

Figure 4.6: Merit order effect

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Scientific studies commissioned by the BMU, prepared on the basis of a detailed electricity market model (PowerACE) and confirmed by an expert discussion, suggested that over the past three years, the merit order effect has reduced the cost of electricity purchased via the spot market by between 2.5 and 7.8 Euros/MWh (see Figure 4.7 below). Hence, the merit order effect reduces the purchasing costs to electricity suppliers, which in turn tends to lower electricity prices.

Figure 4.7: Reduction of electricity cost due to merit order effect

4.1.4. R&D on RE Technologies

Research and development projects on renewable energy sources are eligible for support under the Federal Governments Energy Research Programme. Investments in renewable energies help to conserve scarce resources, reduce our dependency on energy imports, and protect the climate and environment. Technical innovations help to reduce the cost of renewable electricity. The German Environment Ministry (BMU) is responsible for application oriented project funding in the field of renewable energy sources (except biomass). The BMU funds research and development in the field of renewable energies, also with a view to job market policy. Research funding strengthens the leading international position and competitiveness of German companies and research institutions, helping to create jobs in a growing world market. The aims and main focus of research support are: To lower the cost of renewable energy systems; To ensure ecologically sound and nature-friendly advancement; To promote resource-conserving production methods; To optimise integration into the electricity grid; To ensure the rapid transfer of technology from research to market; To promote system-based integrated solutions, such as combinations of thermal insulation, house technology and renewable energies in the buildings sector; To encourage transboundary projects and technologies for use primarily in other countries; To strengthen the competitiveness of German companies and research institutes; To promote cross-sectoral research (economic issues, jobs, system studies etc.).

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Figure 4.8: R&D expenditures by RE technologies

In 2007, a total of 177 new projects with a total volume of more than 100 million Euros were approved by the BMU in the fields of photovoltaics, geothermal energy, wind energy, lowtemperature solar thermal energy, solar thermal power plants, as well as overall strategy and overarching issues. In 2007, the main share of newly approved funding went to photovoltaics and wind energy. There is a particularly pressing need for research and development work in the field of photovoltaics, because the FiT rates show the highest degression in these areas, and it is vital that suitable cost reductions are achieved. In addition, there is still a huge potential for innovation in this field. Ultimately, it is to safeguard Germanys leading international position in photovoltaics research, and improving the competitiveness of German companies in a rapidly expanding global market. In the area of wind energy research, the biggest challenges are in the offshore sector. In 2007, approval was granted for the first research projects in Germanys first offshore test field alpha ventus. High-level support is also given to research in other areas.

4.1.5. Scenario for an Intensified Expansion of RE in Germany

The 2006 scenario in the BMU study illustrates the potential development of energy supply until the year 2050. Through the intensified expansion of renewable energy sources and the more efficient use of energy, it is possible to reduce CO2 emissions by 80% compared with the 1990 levels. It is anticipated that as early as 2020, 18% of final energy consumption and around 27% of gross electricity generation can be met from RE sources. By the year 2050, RE could then account for around half of total primary energy consumption. By that date, around 80% of electricity consumption could be derived from RE, and around 48% of heat consumption. Renewables could potentially contribute 42% to fuel consumption.

Figure 4.9: Expected impact and role of RE in the German electricity supply industrynd th

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4.2. Reason 1: To Address Current Market Failure

Details of market failures are set out in Chapter 3.1 ante. A new RE Policy is needed to devise strategies to address the RE-specific market failures, in order to avoid perpetuating the associated inefficiencies into the future. This provides a clear signal to businesses of the importance of RE as a source of electricity to the country, and which can positively influence the investment decisions by these firms.

4.3. Reason 2: To Provide Long Term Sustainability

Long term sustainability is vital for the RE policy because of the length of time needed for the technology to become cost competitive (grid-parity). This means that the policy needs to militate against stop-start strategies, have clarity of outcomes and secure the commitment of all stakeholders.

4.3.1. Avoid Stop and Start Strategies

Countries that adopted short-term strategies usually ended up with start-stop RE development efforts, and tended to lack long-term commitments in the utilisation of renewable energy resources. With such short-term targets, the contribution of RE in total fuel mix is considered insignificant and unpredictable for long-term dependability, and electric utilities, for instance, cannot be blamed for continuing to ignore RE and focused instead on planning for large centralised conventional or nuclear power plants in future generation mix. The German RE programme began in 1986 and the policies have been enhanced and improved over the last 23 years. Yet a key lesson that should be learnt is that the significant increase in RE power plants and businesses was experienced when an effective incentive mechanism was introduced (i.e. the feed-in-tariff) and supported by legislation (Renewable Energy Sources Act). No longer was the policy subject to the changes in the political office, nor was there a concern that the policies would take a stop-start approach. Successive governments did not change the course of the policy but learnt lessons and enhanced the policy until they got it right.

4.3.2. Sufficiency of Outcomes

The outcomes of a policy need to be clearly identified, especially if public funds are needed to provide soft loans or other financial assistance. The need for specifying outcomes enables the policy to gather support from the stakeholders since they would recognise that the policy is to 17 produce a public value . The current RE policy merely states that RE is to be used as a fifth fuel. Targets (in terms of generation capacity to be installed) are stated in the Malaysia Plans. However, the convergent nature of RE means that this (generation capacity) is only one dimension of an RE Policy. Outcomes vis--vis industry growth or environmental improvements need to be identified, in order to complete the RE Policy.

17

Note: Public value is a concept introduced by Moore, to identify what citizens should expect of public managers. Thus public sector managers should be focusing on creating public value by their actions. See Moore, M.H. (1995) Creating Public Value Harvard University Press at p.27 et seq.nd th

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4.3.3. Commitment by All Stakeholders

There is a need for long term commitment by all stakeholders with Government playing a leadership role. In Malaysia where the leadership role has been played by Government (with industry taking a follow-the-leader approach) the success or failure of any new policy requires the presence of clear political will, change champions and supportive regulatory framework. A policy that is able to secure commitment over the long term is preferable than one that does not. Therefore revising the existing policy to secure such commitment is necessary. Currently the policys focus is on RE as a fuel. This immediately excludes the public from the purview of the policy, who are key stakeholders. It becomes a specific industry policy, the value of which is not seen or recognised fully by stakeholders particularly the public. Accordingly it is necessary that a new RE policy be developed in order to secure the commitment of all stakeholders.

4.4. Reason 3: To Provide Focus for a New Growth Industry

There is no RE industry to speak of in Malaysia at the present time. To date, there have been five foreign direct investments to set up solar PV manufacturing facilities that provide employment opportunities: First Solar (USA) in Kedah, Renesola (China) in Johor, Q-Cells (Germany) in Selangor, SunPower (USA) in Melaka, and Tokuyama (Japan) in Sarawak. Various studies undertaken by REN21 and the UN have identified the different drivers that spur market growth in renewable energy. The most notable drivers are: Investments in technology research, development, and demonstration (RD&D); A supportive policy and regulatory frameworks; Energy security issues; Environmental and climate change concerns; and Local and regional development opportunities that these technologies offer.

Available data shows that about 2.3 million people worldwide work either directly in renewables or indirectly in supplier industries; 230,000 jobs were created by the RE industry in Germany in 2006; whilst the Spanish RE industry now employs some 188,000 people directly and indirectly; the volume of trade in Germany by the RE sector in 2006 accounted for approximately 22.9 billion Euros; and worldwide spending in RE rose from US$ 55 billion (in 2006) to US$ 71 billion (in 2007). The two largest RE sub-sectors are wind and solar, whose combined growth significantly exceeds the other sub-sectors as illustrated in Figure 4.10 below.

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The growth of approximately 40% means that there is tremendous opportunity for Malaysian businesses to participate in; particularly as a means to cushion the impact of the 2009 global economic crisis. At the same time developing and under-developed countries are catching up in the RE industry; 19 for example according to Worldwatch Institute , Kenya has one of the largest and most dynamic solar markets in the developing world. There are 10 major solar PV import companies, and the Kenya has an estimated 1,000-2,000 solar technicians. In Bangladesh, Grameen Shakti has installed more than 100,000 solar home systems in rural communities in a few years one of the fastest-growing solar PV programmes in the world and is aiming for 1 million by 2015, along with the creation of some 100,000 jobs for local youth and women as solar technicians and repair and maintenance specialists. Opportunities in this sector lie in the manufacturing and export of RE components (e.g. turbines or 20 components) or feed-stock (e.g. silicon) although currently undertaken by India and China ; the creation/emergence of support industries to manufacturing facilities (e.g. outsourcing R&D services); and the creation of specialized service providers, which can be exported to the region; need to be capitalised. Therefore an RE policy that provides the impetus and incentives for both large enterprises and SMEs to invest in the RE sector will provide positive effects and outcomes, via export activities, job creation, foreign and domestic direct investments, emergence of support industries and services (e.g. solar technicians, maintenance specialist) and technology development; thereby pushing Malaysia up the knowledge value chain.

4.5. Reason 4: To Recognise the Importance of Environment as an Economic Growth Contributor

21

the

According to a 2005 report , the world market for environmental goods and services is estimated to be worth 425 billion Euros and is likely to grow to 565 billion Euros by 2010. Michael Porter of Harvard University showed that countries with high environmental standards often have marketleading firms and record better economic performance than those with lower standards. This is because high standards can stimulate innovation both in firms selling environmental solutions and in those having to comply. The conclusion reached is that there is now significant evidence from international research that good environmental management and regulation does not impede overall competitiveness and economic development; but can be beneficial by creating pressure that drives innovation and alerts business about resource inefficiencies and new opportunities.

19

See Jobs in Renewable Energy Expanding by the WorldWatch Institute available at http://www.worldwatch.org/node/5821?utm_campaign=vsonline&utm_medium=email&utm_source=green_jo bs#notes (accessed on 17 Feb 2009) 20 Note: In China, the two primary domestic manufacturers were Goldwind and Sinovel Wind, with 33 percent and 6 percent of the Chinese market, respectively, in 2006. By 2007, there were more than 40 Chinese firms aspiring to manufacture wind turbines commercially, many of which were engaged in prototype development and testing, and a handful that were beginning to produce commercial turbines during 2006/2007 [see Renewables 2007 Global Status Report available at http://www.ren21.net/pdf/RE2007_Global_Status_Report.pdf (accessed on 17 Feb 2009)] 21 See The Contribution of Good Environmental Regulation to Competitiveness, (Nov 2005) available from http://www.eea.europa.eu/about-us/documents/prague_statement/prague_statement-en.pdf (accessed on 18 Feb 2009).

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4.5.1. Spurring Innovation and RE Take-up

Fossil fuel combustion and the corresponding increases in emissions of pollutants contribute to the global warming problem. Malaysia can do its part under the United Nations Framework Convention on Climate Change (UNFCCC) and respond to the threat of global warming by supporting RE projects that will reduce green house gas (GHG) emissions. In addition, RE projects can lead to very cost-effective emission abatement opportunities and represent choice opportunities for investments under the Clean Development Mechanism (CDM). In Malaysia, the total CO2-equivalent emissions for the year 2006 amounted to 169,829 GgCO 2. The power sector was the major and largest contributor with 56,203 GgCO2 which accounted for 33% of the emissions. Whilst the various types of fossil fuels used in power generation, contribute different amounts of GHG into the atmosphere, biomass energy is carbon-neutral, releasing the same amount of carbon dioxide as it absorbs, while wind and solar has zero emissions.

Percentage of CO2-equivalent of different fossil fuels Natural gas based power generation contributed 57% of the total power sector emissions and coal based power generation contributed 40%. However, coal only accounted for 29% (5,743 ktoe) of the total fossil fuel consumed by the power sector as compared to 69% of natural gas (13,761 ktoe), as coal emits more CO2-equivalent per MWh compared to natural gas.

The existence of CO2-equivalent and GHG emissions in the Malaysian environment provides an opportunity for the new RE policy to address ways and means by which such emissions can be managed. Evidence available shows that providing for stricter environmental standards will cause innovation to emerge within companies affected by such standards and at the same time result in environmental goods and services being provided. Such environmental standards can also spur the take up of RE as a clean energy source and as a counter-measure to the current emissions by conventional energy producers. Therefore an opportunity exist for an RE policy to recognise the importance of environmental management both as a source for a cleaner environment and as an economic contributor. This means that the RE policy can and should introduce specific initiatives that provide a push to overcome business inertia, to alert and educate companies about resource efficiencies and the potential for technological improvement.

4.6. Reason 5: To Spur RE Technological Diffusion

Adoption of RE technology into the mainstream requires an effective diffusion process. The adoption of all forms of new technology follows an S curve, with the primary difference being 22 their length of time. Shapira (1996) points out that technology can diffuse in multiple ways and with significant variations, depending on the particular technology, across time, over space, and between different industries and enterprise types. Moreover, the effective use of diffused technologies by firms frequently requires organizational, workforce, and follow-on technical changes.

22

Shapria, P (1996) An Overview of Technology Diffusion Policies and Programmes to Enhance the Technological Absorptive Capabilities of Small and Medium Enterprises, A background paper prepared for the Organization for Economic Cooperation and Development Directorate for Science, Technology and Industry, available at http://www.prism.gatech.edu/~jy5/pubs/oecdtech.htm (accessed on 18 Feb 2009).

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Furthermore the economics of diffusion needs to be carefully considered since diffusion is not a trivial process, takes a long period of time to occur, and is equally important as innovation, since a new technology would not have an economic impact until it becomes widespread in the economy. RE technology is experiencing the same diffusion process, and the speed or pace of the diffusion domestically is reflected in the presence or absence of two key drivers namely: (i) (ii) Significant technical hurdles (skills-driver); and Significant commercial hurdles (economic-driver). Studies have shown that there is a positive correlation between skill and new technology adoption.23

As the current policy focuses on RE as a mere fuel, it is not suited for promoting or accelerating RE technology diffusion. Thus new policy measures are needed to promote or accelerate the diffusion of technology; and to address the impediments in technology diffusion by focussing on up-skilling and reducing the economic hurdle to technology adoption.

4.7. Reason 6: To Improve on the Coherence of Current Policy

A review of the existing renewable energy policies evidenced the lack of inter se coherence amongst the various policies. This has the unintended effect of sending mixed signals to the market as to the importance of RE, commitment towards the introduction of RE in particular, and the recognition of the cost of the environmental externalities produced by the business-as-usual approach. The lack of coherence of the RE Policy with the other policies is shown below:1. In the 9 Malaysia Plan (9MP) emphasis is given to coal as a fuel for generating electricity since it is stated that coal as a fuel for generating electricity will be increased to 36.5% by 2010 because it enables security of electricity supply to be achieved, will minimise generation cost despite the environmental objectives not being met; yet at the same time RE is promoted as a fifth fuel. The emphasis on coal dilutes the relevance and appropriateness of RE as the fifth fuel. Such an emphatic statement by Government as to the use of coal is a strong indication that RE may not be high on the Governments policy agenda; Technology-specific support (i.e. RE from biofuels and municipal solid waste) are being emphasised but not for other forms of RE sources. As a consequence energy generation using other RE sources e.g. PV will become a second choice as the market adjusts to adopting the first choice technologies to secure Government support (Government is picking winners); The promotion of environmental self-discipline by the National Policy on the Environment 2002 via a self-regulatory framework is not consistent with the polluter-pays principle, since there is no incentive for a polluter to want to achieve the next best situation (e.g. minimise pollution levels) without regulatory intervention;th

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Effect of Mixed Signals

Government policy provides the market with signals for proper and sound investment decisions by businesses, with the choice of action left to the individual firm to select. When mixed signals are sent to the business sector (as identified below), the degree of uncertainty over Governments commitment towards RE is exacerbated, thus affecting firms investment decisions. The mixed signals are: (a) RE is not as important as coal for electricity generation. There is an over-emphasis on supply and diversification from oil-based fuels to coal as set out in the national energy policy, four-fuel diversification policy, the national depletion policy and the 9MP without there being an equivalent support for RE. This has the effect of de-emphasising RE. The manner in which the fifth fuel was introduced as two lines in the 8 Malaysia Plan (8MP) and as a statement in a development plan (i.e. the 8MP) conveys a message that (as yet) Government is not entirely serious on or fully committed to RE as a full fledge fuel of choice. Thus the market may and can be led to believe that Government supports a business-as-usual approach. (b) A business-as-usual approach is preferable to one that requires change There is insufficient policy support for managing environmental externalities because: (1) The National Policy on the Environment 2002 emphasises polluter-pays principle, whilst on the other hand the Environmental Quality Act 1976 does not prescribe minimum standards of air or noise quality; similarly encouraging self24 regulation that industries develop policies that results in operations and productions that have lower environmental impacts, ignores the fact that without appropriate incentives and penalties, self-regulating firms are unlikely to act voluntarily; and The National Objective Strategies relating to energy strongly emphasises the supply objective with little attention (i.e. 25 strategies setting) for the environmental objective . Yet the recognition that emission of pollutants to the atmosphere constitutes the biggest impact of the energy sector on the environment and the lack of action provides the signal to the market that the importance of environmental protection is low.th

(2)

Consequently it is perceived that only secondary importance is being given to environmental concerns, and that traditional industrial growth is more important.

24

See Chapter 4 Prevention and Control of Pollution and Environmental Degradation of the National Policy on the Environment 2002, available at http://www.doe.gov.my/dmdocuments/natonal%20policy/National%20Policy%20on%20the%20Environment %20on%2010.19.151.21/dasar.pdf (accessed on 8 May 2008). 25 Only 1 strategy relates to the environment objective, whereas 6 relate to the supply objective of the National Energy Policy.

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5.

RENEWABLE ENERGY RESOURCES & SMART TARGETS

Utility planners do not consider RE to have significant impact on power generation, and do not factor in the RE contribution in generation expansion analysis, because: (1) The growth of RE installations in Malaysia to date has been insignificant. Using historical growth data to project RE scenario into the future is not valid and obviously would put renewable energy at a disadvantage. It is still perceived that the potential of renewable energy is small and limited and it cannot serve as a long-term solution to the energy problem in this country. There are still technically-oriented people in this country who are unaware of the remarkable strides achieved in Europe and other countries, and those who think that RE is still in the stage of research and development. Energy from RE facilities is considered not as dependable as traditional energy sourcesthey are often subject to fluctuations in fuel availability or primary energy such as wind and sunlight. RE facilities cannot compete with conventional energy in terms of scale on unit sizes. RE is expensive compared to conventional energy sources.

(2)

(3)

(4) (5)

For electric utilities, the options for future energy supply are from traditional fuel sources such as large scale hydropower, coal and nuclear power. Yet the impact of using carbon-based fuels for energy generation leads to environmental degradation and climate change. Large scale hydropower systems whilst appearing to be environmentally positive have significant long-term environmental impact because of the destruction to the forests that is necessary. These choices reflect (a) the strong influence of fuel costs and (b) the lack of internalisation of the costs of the environmental damage by their actions. Yet fuel choices such as coal, whilst there are still large coal reserves available globally, the demand for coal is rapidly rising especially with energy-hungry countries such as China and India. Nuclear power has seen a new revival, as more countries look to nuclear power as a means to address their energy demands. Compared to other conventional energy sources (other than hydropower), it does not emit any greenhouse gases; but there are long-term nuclear waste disposal issues, risk of misuse and nuclear proliferation issues arising from waste fuel reprocessing; which raises national security issues. The continuation of Malaysias use of natural gas to provide the fuel for energy generation cannot be sustained for the long term. Alternative fuels need to be explored. Using coal means that Malaysia would have to compete with countries like China and India for this fuel, which may not make it viable for Malaysia. Selecting nuclear as an option would require a significant amount of investment to be made, especially as there is a poor culture of maintenance in this country. It seems therefore that the time is right for RE. It is clean (as there is no greenhouse gases emitted), sustainable (biomass is available from our palm oil plantations), available (the high irradiance factor in Malaysia) and has a positive socio-economic development for the country. Finally the development costs for RE is expected to decline whilst the development costs for conventional energy is expected to rise. This is shown in Figure 5.1 below.

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Grid Parity

Figure 5.1: Costs of renewable and conventional energy sources

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5.1.1. Grid Parity

Grid parity occurs when the cost of generating renewable electricity is equivalent or cheaper than the cost of generating electricity from conventional fossil fuel or nuclear energy. The time for this to happen varies between countries or locations, depending on specific cost of the fuel, the peak energy cost, as well as the external cost to protect the environment. Electricity from RE has a higher initial cost as it is a new technology and not directly subsidised, while the costs of fossil fuel and nuclear energy are continuously rising. When grid-parity is achieved, RE would then be applied primarily due to economic reason, as it would be the cheaper choice.

The potential of some of these major RE resources are examined below in order to arrive at the targets set out in Chapter 5.7 of this report. * Note: The detail resources potentials are yet to be fully examined and verified.

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5.3. Biomass Wastes and Biogas Potential

Malaysia is the worlds second largest producer of crude palm oil. A study by PTM/SIRIM carried out in 2004 estimated that in 2002, 362 palm oil mills in the country processed about 59.8 million tonnes of fresh fruit bunches (FFB) and produced 11.9 million tonnes of crude palm oil (CPO). The by-products from mill processing include solid wastes from the empty fruit bunches (EFB), mesocarp fibres and shells, and palm oil mill effluent (POME). In 2002, a total of 22.6 million tonnes of solid biomass (EFB, fibres and palm kernel shells) and 41.9 million tonnes of POME were generated from the palm oil industry. In addition the Northern Corridor Economic Region has a sustainable materials cluster which seeks to promote the 27 manufacturing of packaging materials from EFB . This adds to the competition for this raw material and is not exclusively used by biomass electricity producers. The palm oil industry has since grown at an average rate of 7.5% p.a. and in 2006, more than 15.8 million tonnes of CPO were produced. In general, it can be safely said that all figures relating to EFB, POME and energy potential from wastes were all revised upwards by 33% from 2002 to 2006. By 2007, the numbers of palm oil mills in the country have grown to 407. Table 5.1 identifies the number of palm oil factories in Malaysia which can produce a quantity of biomass necessary for a 10 MW class CFB power generation plant.

17 factories are located in Sabah and Sarawak, whilst 12 are in Peninsular Malaysia. Based on size of palm oil plantations in Malaysia, their annual production of biomass material is a maximum of 26 million tonnes per year. Details are shown in Table 5.2 below.

East Malaysia Total

Additionally the transport cost of biomass is estimated at 0.20 US$/tonne/km; which needs to be considered when exploring the use of smaller plantations as fuel feeders, bearing in mind the location of the RE biomass plant. Of the total biomass production, EFB produces 12.5 million tonnes annually, fibre 9 million tonne, 28 and Palm Kernel Shells 5 million tonnes. Regionally, 60%of all biomass from palm oil factories comes from the Peninsular Malaysia and 30% from Sabah. The current utilisation of mesocarp fibres and kernel shells to generate steam and power for palm oil mills across the country because of their high quality as fuels and the ease in preparation, mean that this source of biomass should be excluded in the estimation of biomass potential. In fact kernel shells have a higher economic value as they have a market price of RM 120-140 per tonne for utilisation in the production of carbon black. This higher price (compared to RM 20 for 29 EFB ) also discourages the use of kernel shells as an RE fuel source. A recent survey of 100 palm oil mills carried out by PTM in 2008 has shown that, after taking into account existing practices (though not necessarily best practices) in palm oil mills. The sampling was considered representative of the whole industry which has a total of 407 mills, as the average throughput of the sample was the same as the average throughput of the entire milling industry. On average, about 22% (by weight of palm oil fresh fruit bunches (FFB) in the milling process were left over as EFB. Most of the mesocarp fibres from the fruits are utilized (98%) for energy generation for self-consumption, topped up by palm kernel shells (38%) as fuels. These figures confirm the commercial value of palm kernel shells (62%) which are being sold for other purposes. The RE potential lies in the use of EFB and POME. However the EFB is used by the palm oil 30 plantation as follows: 62% for mulching , 6% composting, 11% burned in incineration, 5% sold commercially and 16% being dumped somewhere in the plantation. Incineration without energy extraction is only allowed by the DOE for older plants from the time they were approved and constructed, but not for newer plants.

28 29

These are used as fuel in the palm oil mills. At least one EFB-based SREP project is known to have signed fuel purchase contract with palm oil mills at a price of RM 5.50 per tonne, and it is obvious just how vulnerable the project viability is because prices can be easily reviewed upwards. 30 Mulching is a process where the EFB were used to cover the soil surrounding young palm trees in replanting so as to retain water in the soil and eventually decomposing to act as organic fertilizer.

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5.3.1. Biomass and Biogas Power Estimate

Based on a conservative calculation and relying on the use of the excess EFB as a biomass fuel source, PTM estimated that only 254 MW can be generated from EFB, while about 438 MW can be generated from biogas from palm oil mill effluent (POME). This estimate is based on an as-is basis. Secondly, with a more conducive RE policy and action plan, improvements in efficiency in existing combustion efficiency in palm oil mills that can extract more energy from the mesocarp fibres and 31 shells as well as from the EFB can be expected ; that the amount for mulching would be reduced 32 to a more optimal level , and open incineration would be abolished. In 2008, the MPOB unveiled The Roadmap for Palm Oil Industry and Latest Advances in the Industry which will have a direct impact on the use of palm oil EFB as a biomass fuel for RE because MPOB seeks to increase industry productivity, empower technology, expand investment, modernize infrastructure and ensure sustainability; and advance the industry towards increased yield and oil extraction rate (OER), reduced wastes (reduced POME and zero discharge), increased conversion of wastes into non-energy products. Taking into consideration of these factors, for purposes of target setting, a potential of 1,340 MW connected to grid from palm oil biomass by 2030 is therefore considered realistic and achievable. This is a very conservative estimate, as it is expected that the palm oil industry is forecast to continue growing in output despite decreasing rate of new acreage being converted to palm oil plantations. The reliance on EFB and other agriculture waste as fuel for biomass plants means that the size of the land used for palm oil plantations and agriculture is limited. This is today limited to 4,000 hectares for palm oil. Therefore the inherent limitations of biomass mean that a reliable maximum capacity that can be made available is 1,340 MW by 2030.

5.4. Mini-Hydro Potential

Although Malaysia had the experience and expertise in mini-hydro systems since the 1970s, 33 these expertise and experience has today been lost . At the same time, data on mini-hydro potential sites, their respective power potentials, etc. were not shared as easily as before nor are they available.

Currently, on average, 7% of fibres and 16% or shells are still discarded. Currently 62% of EFB is used for mulching. 33 Notes: In the wake of the oil embargo in the 1970s, TNB became actively involved in the development of mini-hydro projects both in Peninsular Malaysia and in Sabah. They even had a special Mini-Hydro Department in the 1980s, and carried out a large-scale survey of potential sites. During its mini-hydro heyday, TNB installed dozens of mini-hydro plants in Peninsular Malaysia and acted as consultant to projects in Sabah and were used as technical resources by institutions such as the World Bank and Asian Development Bank for developing countries such as Papua New Guinea and Nepal. Subsequent to its privatization in 1990, TNB had outsourced the operation and maintenance of most of their mini-hydro projects to the private sector.

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East Malaysia Total

State Sabah Sarawak

Installed Capacity (MW) 8.335 7.297 28.993

In general, the suitable mini-hydro projects would be those based on the run-of-theriver schemes, and of sizes of up to 10 MW to 30 MW capacity. Exemption to the requirement that eligible mini-hydro projects should be run-of-river types should be given to dam-toe projects from water supply schemes. A common issue in mini-hydro development is their remote locations. Although the potential can be quite high, feasible projects should be those within reasonable distance of say 10 km or less from the nearest points of interconnection. Therefore the scarcity of available data means that there is a need to collect sufficient data to undertake an evaluation of the potential. Taking into account the paucity of data, and making an extremely conservative guesstimate of the potential, mini-hydro target of 490 MW is capable of being achieved by 2020.

5.5. Solar Power Potential

Solar photovoltaic (PV) cells convert sunlight directly into electricity. Solar cells are often used to power calculators and watches. They are made of semiconducting materials similar to those used in computer chips. When sunlight is absorbed by these materials, the solar energy knocks electrons loose from their atoms, allowing the electrons to flow through the material to produce electricity. This process of converting light (photons) to electricity (voltage) is called the photovoltaic (PV) effect. Solar cells are typically combined into modules that hold about 40 cells; a number of these modules are mounted in PV arrays that can measure up to several meters on a side. These flatplate PV arrays can be mounted at a fixed angle facing south, or they can be mounted on a tracking device that follows the sun, allowing them to capture the most sunlight over the course of a day. Several connected PV arrays can provide enough power for a household; for large electric utility or industrial applications, hundreds of arrays can be interconnected to form a single, large PV system. Thin film solar cells use layers of semiconductor materials only a few micrometers thick. Thin film technology has made it possible for solar cells to now double as rooftop shingles, roof tiles, building facades, or the glazing for skylights or atria. The solar cell version of items such as shingles offer the same protection and durability as ordinary asphalt shingles. Some solar cells are designed to operate with concentrated sunlight. These cells are built into concentrating collectors that use a lens to focus the sunlight onto the cells. This approach has both advantages and disadvantages compared with flat-plate PV arrays. The main idea is to use very little of the expensive semiconducting PV material while collecting as much sunlight as possible. But because the lenses must be pointed at the sun, the use of concentrating collectors is limited to the sunniest parts of the country which receive direct sunshine. Some concentrating collectors are designed to be mounted on simple tracking devices, but most require sophisticated tracking devices, which further limit their use to electric utilities, industries, and large buildings. The performance of a solar cell is measured in terms of its efficiency at turning sunlight into electricity. Only sunlight of certain energies will work efficiently to create electricity, and much of it is reflected or absorbed by the material that makes up the cell. Because of this, a typical commercial solar cell has an efficiency of 15%, about one-sixth of the sunlight striking the cell generates electricity. Low efficiencies mean that larger arrays are needed, and that means higher cost. Improving solar cell efficiencies while holding down the cost per cell is an important goal of the PV industry.

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Figure 5.2: Solar irradiance levels in Malaysia

Malaysia being an equatorial country has a high irradiance level, well suited for PV generation. Details are set out in Table 5.4 below. The investigations of PV applications in Malaysia use a modified tilt angle as 30 is not optimum for locations around the Equator. Near horizontal tilt is more favourable and installations will normally have about 5 to 15 tilt angle to be efficient and still allow the PV system to follow the roof slope.

PV technology appears to offer the most suitable long-term prospect. Worldwide trends in the development and use of solar PV are significant, as shown in Table 5.5. Countries that have an aggressive solar PV promotional policy include Germany and Spain.

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Country France China India Portugal Australia Greece Rest of Europe Rest of World Total CAGR Growth year to year

Installed PV in 2007 45 20 22 15 12 2 40 120 2,508 MW approx. 36% 60%

PV in 2008 (E) 130 40 28 30 15 20 60 160 5,613 MW approx. 60% 124%

PV in 2009 (E) 220 65 50 50 40 200 129 210 5,964 MW approx. 40% 6%

As can be seen in Figure 5.3 below, global growth in solar PV panel production was estimated to grow at 53% per annum while prices per kW have come down by 3% to 4% per annum. Latest news show that this trend is accelerating even faster than earlier anticipated. The technology has almost reached technical maturity, as conversion efficiency is near the peak, and reliability in terms of lifetime cycle reaching more than 25 years. Development efforts are no longer focused 34 so much at improving conversion efficiency (e.g. kW output per square meter surface area), but more in bringing production costs and prices down per kW of photovoltaic capacity.25Production (GW) Global avg wholesale price (US$/W) Global avg installation price (US$/W)

12

20

10

Worldwide production GW

15 6 10Wholesale price

4 5

0 2005 2006 2007 2008 2009 2010 2011

035

Figure 5.3: World costs and price trends for solar photovoltaic

5.5.1. Solar Power Estimate

As a rule of thumb, a three storey energy efficient building in Malaysia installed with solar PV 2 36 panels on its 1,000 m roof may be able to generate all the electricity that it needs . Taller urban

34

Of course, there is still scope for further technical improvements, as it was reported that increased energy outputs from newer PV modules can be achieved because of better sensitivity to a wider spectrum in the solar radiation. 35 Source: Photon International, September and October 2007 issues 36 Design of the PTM Zero-Energy Building in PTMs Energy Smart, Issue 0017, Quarter 1.nd th

Price, US$/Watt

Installation price

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buildings have higher density of occupancy and larger volume per square meter of roof area, hence roof-top solar PV modules cannot provide all the energy needs for those types of 37 buildings . The real opportunity lies in homes (residential areas), warehouses, and other low-rise commercial buildings. Factories, however, typically consume high levels of energy due to production machineries or similar equipment, and will never be expected to be energy selfsufficient through solar PV but can provide the large roof spaces for solar PV. In estimating the solar power potential in Malaysia and the setting of targets, it is recognised that the constraint is not so much the availability of solar radiation, but more on the availability of funding and the domestic and international production facilities to cope with demand. Solar PV module market is subjected to and focuses on the global market, and even local production outputs are directed towards export to high growth demand in Europe, USA and Japan. Therefore a reasonable target for grid-connected solar PV as building integrated (BIPV) application is 850 MW by 2030 (and more than 8,000 MW by 2050) that can grow unlimitedly as it is not constraint by land availability. This is arrived at by the following assumptions: Using 2003 data and the suitable building roof surfaces the estimated amount of energy 2 2 that PV can produce is approximately 6,500 MW (i.e. 65 million m x 100 W/m ); The building roof surfaces are from 40% of total number of households (i.e. 2.5 million 38 houses) and 5% of total commercial buildings (i.e. about 40,000 commercial buildings) ; Solar BIPV energy opportunity 7.8 TWh, about 21% of residential and commercial electricity demand in 2005 (1 kW = 1200 kWh/year)

5.6. Solid Wastes Potential

Current data from the Ministry of Housing and Local Government suggest that the total waste collected and disposed per day in Malaysia is approximately 21,000 tonnes. It is forecasted that 39 by 2022, waste collected would reach 30,000 tonnes per day (implying a compounded growth rate of 2.5% p.a.). This is estimated to give a power capacity potential of 360 MW in 2022. Currently, an integrated waste management plant owned by Core Competency/Recycle Energy is already operating in Semenyih, Selangor with a capacity of sorting and treating a maximum 1,000 tonnes per day, and a power generation plant. From the normal intake of 700 tonnes/day of wastes, the plant can sort the combustible waste and generate a gross power of 8 MW, of which 5.5 MW would be available for export to the utility. If all future waste-to-energy plants are based on this integrated concept involving recycling, etc, the power potential for target setting would naturally be reduced, as other waste products are either recycled or directed towards more value-added products. Additionally there are already many solid waste dumping grounds that have been closed as 40 shown in Table 5.6 below. These sites have potential to generate electricity from landfill gases .

37

Thin-film PV panels fitted on building faades can increase energy outputs, but again they are only applicable at the higher floors to avoid shadow areas. 38 Source: TNB statistics based on their customer information 39 This takes into assumes that the Ministrys recycling and other waste reduction programmes are successful. 40 See the existing TNBs 2MW Jana Landfill power plant in Puchong, Selangor.

Number of closed dumping sites 1 3 2 9 12 11 7 10 5 21 5 12 1 12 111

5.6.1. Solid Wastes Power Estimate

Solid wastes (RDF, incineration, sanitary landfills): 378 MW can be installed by 2024. This is based on the assumption that 30,000 tonnes/day of solid wastes would be produced as projected by KPKT, followed by 3% annual growth post 2024 according to increment of the population.

5.7. SMART Targets for Renewable Energy

Based on the detailed analysis above, and taking into consideration the technical limitations (particularly of the availability of fuel sources) and the need for sustainability, the suitable targets for renewable energy must be specific, measurable, achievable, realistic and time-specific (i.e. SMART). These SMART targets are a conservative assessment of Malaysias RE resources, with a sensitivity of 10%. Thus, the overall SMART targets are as follows: Electricity Capacity Mix: By 2030, total capacity from RE is targeted to reach 3,484 MW or 13% of total peak electricity demand capacity by 2030; Electricity (Energy) Mix: By 2030, total electricity mix from RE is targeted to reach 16.5 TWh/year or 10% of total electricity generated. Given the present low actual capacity of RE projects, the development of RE has to be accelerated to grow at 18% of compounded annual growth rate from 2010 to 2030. In terms of greenhouse gas emissions, it is calculated that, by 2030, an accumulated 208 TWh of electricity from renewable energy resources would be generated, avoiding 131 million tonnes of CO2 from the power generation sector.

41

Source: Jabatan Sisa Pepejal, Ministry of Housing and Local Government (2008)nd th

Cum. MiniHydro (MW) 60 290 490 490 490(3) 490 490

2011 2015 2020 2025 2030 2035 2040 2045 2050

1,340(1) 1,340(1)

410(2) 410(2)

490(3) 490(3)

Notes to Table 5.7: (1) (2) (3) This is the maximum potential that can be realised from palm oil EFB and agro-based industry; This is the maximum potential that can be realised from POME, agro-based and farming industries; This is the maximum potential that can be realised from mini-hydro.

Figure 5.5: Annual electricity production from RE resources

Figures 5.4 and 5.5 indicate modestly the potential of RE in terms of national installed power capacity and electricity generation, under the SMART target. It is critical to recognise that this scenario is only possible when the proposed National RE Policy and in particular the Strategic Thrust 1 of introducing an appropriate regulatory framework (RE Law which facilitates the feed-in tariff and funding mechanisms) are instituted and effectively implemented. Under the umbrella of the RE Law, it is expected that for the first 15 to 20 years, biomass energy would have a significant role to play until it reaches the limitation of the plantations. Solar energy has a very important role to play in the long-term, as it is the only unlimited source of energy with significant capacity available in the country. The impact of electricity production from solar energy is expected to greatly increase as compared to the illustration in Figure 5.5, as solar technology is progressing fast whereby its efficiency would leap over the coming years. This scenario however was not incorporated into the illustration of Figure 5.5. The detailed targets for energy (by RE resources) and environmental CO2 avoidance are shown in Table 5.8.Table 5.8: Energy and environmental target from 2011 to 2050Year End 2011 2015 2020 2025 2030 2035 2040 Annual Biomass (GWh) 675 2,024 4,906 7,297 8,217 8,217 8,217 Annual Biogas (GWh) 123 613 1,472 2,146 2,514 2,514 2,514 Annual MiniHydro (GWh) 300 1,450 2,450 2,450 2,450 2,450 2,450 Annual Solar PV (GWh) 7.7 60.5 192.5 438.9 939.4 1,845 3,387 Annual Solid Wastes (GWh) 123 1,223 2,208 2,330 2,392 2,453 2,514 Annual RE Generation (GWh) 1,228 5,374 11,227 14,662 16,512 17,479 19,082 Annual CO2 Avoidance (tonne) 773,325 3,385,406 7,073,199 9,237,274 10,402,484 11,011,455 12,021,673 Cum. Total RE (MW) 217 975 2,065 2,809 3,484 4,317 5,729

1 MWh of RE electricity avoids 0.63 tonne of CO2.

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6.

THE RENEWABLE ENERGY POLICY

This Chapter sets out a proposed vision statement, and the set of objectives and related strategic thrusts of a forward-looking RE Policy. The new RE policy is intended to transform Malaysia to become a leader in renewable energy applications. This will ensure that Malaysia will develop into a nation that is able to satisfy its own energy needs from indigenous resources, be independent from fuel imports, and able to conserve its natural environment so that it can also be enjoyed by the future generation. A big local RE industry could ensure that the power generation from fossil fuel or nuclear be minimised while creating a new source of economic activity for the country. A more informed and committed Malaysians in utilising RE can ensure that such aspiration and vision would be achieved.

6.1. Policy Vision

A policy vision provides for the long-term goal that all stakeholders should strive towards realisation. Enhancing the utilisation of indigenous renewable energy resources to contribute towards National electricity supply security and sustainable socio-economic development.

6.2. Policy Objectives

A forward looking RE Policy embodies elements of energy, industry and environmental policies, making it convergent in nature. This is reflected in the five objectives set out below: (1) (2) (3) (4) (5) To increase RE contribution in the national power generation mix; To facilitate the growth of the RE industry; To ensure reasonable RE generation costs; To conserve the environment for future generation; and To enhance awareness on the role and importance of RE.

6.3. Policy Mission (RE Strategic Thrusts)

To achieve these five policy objectives, a policy mission comprising five strategic thrusts have been identified; namely:

Thrust 1:

Introduce Appropriate Regulatory Framework

This requires that an appropriate, robust and efficient regulatory framework that addresses market failures and provides incentives for firms to enter into the RE generation market be introduced and implemented.

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The regulatory framework should provide for the introduction of a feed-in-tariff (FiT) which will act as a catalyst for the entry of RE power generation businesses, RE industries and R&D in RE. Furthermore with the reduction of environmental pollution, society benefits; and this means that society must play its part by contributing to a fund to be used to pay for the RE power (particularly as the retail tariffs contain subsidies and have today been reduced, and exclude the external costs). Payment of this contribution, which can be embedded into the electricity tariff structure, must be made to a specific RE Fund and not part of the receipts by Government (as such receipts must be paid into the Consolidated Fund). There are consequently direct spill-over effects as such a regulatory framework would act as a catalyst for the emergence of RE industries, undertaking of R&D in RE technology and innovation (e.g. via improved boiler technologies etc.). The measurable outcomes of this thrust include the rate of increase in use of RE, the decreasing (or constant) rate of fossil fuel consumption for conventional power generation and reduction of the CO2 emissions. Thrust 2: Introduce Conducive Stimulus Package for RE Businessesnd

The 2 Policy Objective identifies the growth of the RE industry. A definition of the RE industry provides clarity of the ambit of this industrial sector. Since the st 1 Policy Objective refers to RE generation, which would cover generation, distribution and sale of energy, it is proposed that the term RE industry refers to the manufacturing of RE components or RE finished products (e.g. boilers, turbines, PV modules, etc.), support industries to the RE manufacturing sector, and RE service providers (e.g. technicians, consultants, engineers, builders) who support RE power generation. The focus of this thrust is on RE industry and RE power generation (which collectively are referred to as RE businesses). The stimulus package would encompass the provision of fiscal incentives, and indirect assistance in the form of reducing the transaction costs for financing, using GLCs and MNCs to lead the charge, and providing assistance to SMEs to participate in the RE business. These are in addition to the feed-in-tariff that of itself provides a stimulus for people to enter the RE power generation sector.

Thrust 3:

Intensify Human Capital Development

RE is a new technology in Malaysia and there is a need for human capital to be developed in order to support the emerging RE Industries. Yet there is a need for a short-term (stop-gap) measure to fill the human capital void in Malaysia by encouraging knowledge workers to relocate to Malaysia.

Thrust 4:

Enhance RE Research and Development

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The focus of the R&D is not on invention but on innovation . For example, the improvements in the microchip were due to innovation (i.e. the idea of standing on the shoulders of giants).

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Invention is defined as the creation of a new product or process.

nd th

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Therefore the implementation of a systemic R&D programme that leads to innovative products and services is preferable as this can accelerate the growth of the RE Industry. Innovation also enhances the diffusion of RE technology by making the technology cheaper and easier to use. This can strengthen businesses competitive edge. Thus it is necessary to develop an R&D implementation plan that articulates the demand, identifies the use of regulation to spur innovation and provides appropriate support for R&D activities.

Thrust 5:

Design and Implement an RE Advocacy Programme

Advocacy programmes that are tailored with specific messages for specific audiences should be implemented. For example an advocacy programme targeted at investors and RE market entrants will need to convey a message that is subtly different from that of a general public advocacy programme designed to secure buy-in to the idea of societal payments for clean environment. The common aim of all advocacy programmes is to increase the awareness of all stakeholders of the benefits and advantages of utilising RE and participation in RE businesses.

Policy mission should be reviewed and (as necessary) embellished over time, once the foundation has been laid. For example when the policy is reviewed in five years time, the original mission of Thrust 1 would have been accomplished with the implementation of an appropriate regulatory framework. Nonetheless, it may need to be improved further or, as necessary, replaced by a new thrust as part of the ongoing mission to realise the Policy Vision. The contributory role of the respective thrust in achieving the policy objectives are summarised in the matrix below:POLICY OBJECTIVES POLICY MISSION 1 Increase RE contribution in power generation Yes Yes Yes Yes Yes 2 Grow the RE industry Yes Yes Yes Yes Yes 3 Ensure reasonable RE generation costs Yes Yes Yes 4 Provide environmental conservation Yes Yes Yes Yes Yes 5 Enhance awareness Yes Yes Yes Yes Yes

Innovation is defined as the making of changes in existing products or services by introducing new methods, ideas or products.

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7.

RE ACTION PLAN: IMPLEMENTATION APPROACH

To achieve the objectives of the new RE Policy, specific actions that provide the most effective results must be identified. The specific actions that should be taken are of two forms: (i) (ii) Direct actions to create or establish the necessary institutional arrangements; and Supporting measures to encourage and nurture the growth and development of the RE businesses.

The nature of the direct actions reflect three guiding principles, namely (i) (ii) (iii) Focussing on activities rather than a sector (as much as possible); The actions must be measurable, i.e. that there must be appropriate criteria to evaluate success or failure; and RE is a technology that needs to be diffused.

7.1. Strategic Thrust 1: Introduce Appropriate Regulatory Framework

For RE to achieve the desired progress, a new Renewable Energy Act is critical to provide the clarity and certainty to the regulatory framework which has the effect of encouraging firms to enter 44 the RE power generation business ; and correct the existing market failures. To implement Thrust 1 effectively and efficiently, a new RE Law should be enacted to introduce a regulatory framework that addresses the specific market failures caused by information asymmetries and the misuse (or potential misuse) of market power. This requires the introduction of a new statute rather than amend the ESA because the analysis of the ESA shows the inadequacy of this law to address issues relating to RE, nor does the ESA provide for a clear framework for the energy industry specifying obligations and rights of firms 45 undertaking generation, transmission, distribution and retail . It does not obligate interconnection to the grid nor specifies the access charges that can be charged (if any). It merely identify persons who build and operate installations, which can encompass all of the above segments, to be subject to licensing, safety requirements and provision of employment or business to specifically licensed class of people whose actions are strictly controlled. In such a case by adding RE into the ESA would be akin to fitting a round peg into a square hole.

7.1.1. Introduce an RE Law

Responsive regulation is an approach that values trust, transparency and professionalism. To achieve the aims of Thrust 1, the structure of the proposed RE Law must take cognisance of the design principles set out in Table 7.1. It is also important that the proposed RE Law provides for a regulatory framework that is consistent with the aim of business stimulus in Thrust 2.

44

From the facts there is evidence that sufficient interests exists in participating in RE power generation (see pages 4 et seq of this report). 45 For example under the ESA there is no power for the Minister to set prices, his power is to approve prices if submitted by a licensee. Therefore the Minister cannot legitimately set prices for which the licensees must comply.

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Table 7.1: RE Law design principles No. 1. Design Principle Proportionality Rationale & Explanation Intervention only when it is necessary. Remedies should be appropriate to the risk posed. The cost of compliance must be identified and minimised. Avoid disproportionate effect on small businesses. There must be a balance between risks, costs and benefits. Regulators must be able to justify their decisions and be subject to public scrutiny. This requires a consultative approach to decision making before decisions are actually made. This necessitates the establishment of: (a) Clear standards and criteria; (b) Well-publicised, accessible, fair and effective complaints procedures and appeals; (c) Clear lines of accountability to Minister and/or Parliament and the public. Application of rules should be consistent. Consistency of application provides clarity to regulatees so that they know what is permitted and what is not. This enables them to make better decisions in undertaking their business. However this may cause a tension with Principle 6 (Flexibility) as tensions may exist. Regulations should be simple, clear and user-friendly. Transparency promotes clarity and regulatees are made aware of what they need to do to comply. Focus on the problem itself and minimise side-effects. This may require goals-based approach with enforcers and regulatees given flexibility to decide how the goals are to be achieved. Those activities which give rise to the most serious risk should be the target of regulation. Regulation should be sufficiently flexible to minimise overly prescriptive regulation, which increases cost to Government to enforce those types of rules. Flexibility allows rules to be changed to suit changing needs of the regulatees. It is necessary to avoid or minimise potential unintended consequences which arises as a result of the regulation in one area. Effective regulation means that it must be practical to enforce. If the rule causes an increase in enforcement demand then the practicality is diminished. With diminishing enforcement, the compliance of regulation would similarly diminish. Regulation cannot be static and should be reviewed periodically, in order to stay relevant and applicable. Regulatory goals and outcomes must be clear. This enables the outcomes of regulatory action based on the regulation to be measured against those outcomes. Thus avoiding uncertainty and inconsistency of application.

These design principles are a guide by which the legislation and regulation can be designed and do not of themselves provide a means by which legislative provisions can be drawn up. More importantly, the RE Law will allow the Feed-in Tariff (FiT) and RE Fund mechanisms to be introduced and implemented.

Feed-in Tariff (FiT)

Feed-in Tariff (FiT) is a mechanism that allows electricity that is produced from RE resources to be sold to power utilities at a fixed premium price and for a specific duration. This will provide a Final draft (2 rev. 18 April 2009)nd th

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conducive and secured investment environment which will make financial institutions to be comfortable in providing loans with longer period (at least 15 years tenure) to finance the renewable energy projects. As a result, RE projects become bankable and can grow unhindered. Therefore, the FiT mechanism will: (i) Provide fixed revenue stream for the installed and operated RE systems; (ii) Only pay the for electricity produced, i.e. promoting RE system owner to install only quality RE systems and maintain the systems properly to generate more revenue; (iii) With a suitable degression rate, the RE manufacturers and installers are promoted to reduce the technology costs while maintaining or improving the quality and efficiency. The disadvantage of FiT mechanism is that it does not address the first cost barrier of high incremental cost. However, this can be addressed through soft loan support or as proven in some countries, this barrier will be removed by itself once the financial institutions get involved in RE projects under the secured environment that FiT mechanism provides. Independent evaluations undertaken between 2006 and 2008 reveal and confirm that a Feed-in Tariff (FiT) mechanism is very effective in introducing and growing the number of RE power plants, spurring innovation and growing the economy through the emergence of new RE Industry, as compared to the quota system or renewable portfolio standard (RPS). A summary of these reports findings are set out in the table below.

Table 7.2: Verifications of feed-in tariff (FiT) effectiveness Report United Nations Development Programme (2008): Promotion of Wind Energy Lessons Learned From International Experience and UNDP-GEF Projects, Chapter 1: Public Policies Year 2008 Findings The report stated that feed-In tariff policies have been very effective in Germany, Spain and Denmark, leading to the worlds first, second and fifth installed wind energy capacities. France and Portugal have also used Feed-In tariffs to become fast growing wind energy countries with 810 MW and th th 695 MW installed in 2006, bringing them to 10 and 9 place in terms of installed capacity (pg. 16). The report summarised that feed-in tariffs are more effective and cheaper than quotas for renewable energy.

The report concluded that feed-in Tariffs are cheaper than trading system whereby comparing the cost to consumer in delivering renewable electricity, the Germanys EEG is cheaper at 2.6 p/kWh as compared to United Kingdoms Renewable Obligation (RO) at 3.2 p/kWh (pg. 13). The report also summarised that feed-in tariffs have the benefit of curbing the cost to the energy consumer of renewable in the context of rising oil prices (pg. 4). The Stern Report (2007) on the financial costs of global climate change was published by the former chief economist of the World Bank, Nicolas Stern. Part IV of the report (Policy Responses for Mitigation) gives a short overview of the existing of incentives for renewable energy projects and differentiates between price based (e.g. FiT Laws) and quantity based (e.g. Tradable Green Certificates) support mechanisms. It points out that based on existing experience price-based support mechanisms (i.e. feed-in-tariffs) achieves a larger deployment at lower costs (see pg.366) as compared to tradable quotas. The report compares feed-in tariffs and quota systems (Tradable Green Certificates (TGCs) / Renewable Portfolio Standards (RPS)). The report concludes that feed-in tariffs

Federal Environmental Agency (2006): Monitoring and evaluation of policy instruments to support

2006

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Report renewable electricity in EU Member States - Final Report

Year

Findings (FiTs) have been more successful in triggering a considerable increase of RE technologies in almost all the countries in which they have been introduced and where their effectiveness was not significantly hampered by major barriers (administrative barriers, grid access, etc.) (pg. 88). In addition, the report states that the risk premium required by investors can be minimised by the high level of price security given by feed-in tariffs, thus lowering the overall costs for consumers and assuring relatively homogenous premium costs for society over time (pg. 88).

Prior to the year 2004, the quota system (also known as renewable portfolio standard or RPS) were the popular mechanism by various Governments to promote RE deployment. Under the quota systems (RPS), the Government sets a target for renewable electricity production that increases over time. Most quota systems allow the target to be met by producing the renewable energy directly and the RE investments are recovered via tradable Green Certificates. Nonetheless, the success of Germanys RE market and subsequent replications by 20 European countries of the Germans EEG (Renewable Energy Sources Act) proved that feed-in tariff mechanism is more effective. A comparison between feed-in tariff and quota system mechanisms are described below.

Table 7.3: Comparison between feed-in tariff (FiT) and quota system (RPS) Feed-in Tariff (FiT) Proven to be the cheaper option; Performance based incentive, encourages reliable operation; Provides long-term investment security and returns; Creates stable and predictable revenue to pay for cost of investment; Degression and periodic reviews allow and stimulate system price reductions due to technological advances (e.g. solar PV); Simple to implement, specific RE developments and FiT costs can be pre-determined and planned in advance; Encourages smaller and distributed power producers and new industries creates greater number of jobs. Quota System (Renewable Portfolio Standard) Less successful in achieving targets (e.g. UK, Sweden); Involves tradable green certificates which are unpredictable in prices; Must have a penalty system; Requires strong enforcement mechanisms; No clear identification of source of funds to meet additional costs; Unpredictable RE prices and costs because of bidding and trade; Usually only one RE technology would be promoted; Usually only bigger company (with resources) would be interested to become developers.

Feed-in tariff needs to be introduced via a legal instrument to guarantee success and effective implementation. Therefore a new law (usually a Renewable Energy Law) will have to be introduced which contain specific details of the feed-in tariff prices and degression, the duration, obligations of various parties, and the review process. Setting up high feed-in tariff rates for the RE technology at the first instance will not guarantee a success without incorporating the other critical success factors which are described below. In almost all cases, the feed-in tariff rates are empirical values and needs to be reviewed or adjusted (of the degression) to suit the growth of RE market. Most importantly, the growth of the RE market is dependent on the available RE fund to pay for the incremental cost of the higher feed-in tariff rates, and this will then limit the achievable RE capacities. Nonetheless, this limitation (if not too small) will provide a realistic opportunity for the local RE industry to grow and mature, and not booming out of hand.

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Conducive FiT rates

Outline of RE LawTherefore, the RE Law must address the following key points: (1) RE prices (FiT) creation of a price (i.e. FiT) setting mechanism that is anchored on economic principles of efficiency and full-cost recovery. The FiT should be designated a regulated price for which negotiations between parties are neither necessary nor allowed. Different levels of FiT, together with a degression rate, should be set for different types of RE technologies. These prices and degression rates should be reviewed at least triannually. A detailed explanation of Feed-in-Tariff (FiT) is set out in Annex B of this Report and a more detail information is available from http://www.onlinepact.org; Details relating to the setting up and operation of the RE Fund and specifying the contribution obligations of consumers. The simplest approach is to set a contribution rate that is applied to the quantity of conventional electricity consumed, as the more one consumes the more one should be responsible for the pollution emitted by conventional generators; Obligation to interconnect the power utilities (grid operators or distributors) must be obliged to interconnect with priority access for transmission and distribution. The cost of interconnection must borne fairly and reasonably on the basis of shallow connection charging, i.e.: The RE producers will pay for the costs of the equipment needed to connect their plant physically to the nearest point of the electricity distribution grid; The power utilities will pay any cost for reinforcement of the network, costs which are passed to the final consumers by including them in the system charges (as rate base) upon the next tariff review.

(2)

(3)

(4)

REPPA the standardisation of terms and conditions of the REPPA to minimise negotiations between the utility and the RE producer.

Consequential amendments to other statutes would be needed to avoid inconsistencies with this new law.

Critical Success Factors for the RE Law

The critical success factors are clearly demonstrated in the German experience with the Renewable Energy Sources Act (RESA EEG), namely:

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(1) (2) (3)

Access to the grid must be guaranteed. Utilities must be legally obliged to accept all electricity generated by private RE producers; Tariffs for RE (FiT) must be high enough to produce a return on investment plus a profit 46 (not excessively) to act as an incentive to firms to enter the market ; Tariffs for RE (FiT) must be fixed for a long enough period (REPPA is typically 20 years) to give certainty. In addition, it will also provide businesses with the security for market development and project financing; There must be a "degression" for the FiT to promote cost reduction to achieve grid parity, 47 where an annual stepwise reduction in tariffs by a certain percentage is mandated . A degression encourages would be RE system purchasers to invest early rather than later (leading to increase in planting of RE power generation systems). It can also add pressure on manufacturers of RE power systems to innovate, so that they continually reduce their production costs, which in turn increases the affordability of the RE power 48 system for subsequent installation of RE systems . Adequate fund is created to pay for the feed-in tariff (or the incremental cost between higher FiT and the displaced electricity cost) and guarantee the payment for the whole contract period. The size of the fund will significantly determine the amount of RE capacity (limit) that can be generated. As a reference, in Germanys case, the fund is unlimited as the FiT cost is passed over to the electricity consumers which have the effect of increasing their electricity bill to not more than 5 per month per household in 2007.

(4)

(5)

When these critical success factors have been changed, affected or removed, there has been evidence of the failure of the RE programme (as seen in some countries).

The Malaysian RE Law must be specific and clear

The law must be clear as to the obligations it imposes, the duties it creates and the rights of the relevant parties. The RE Law must address specific issues and shortcomings such as: (1) (2) Remove the need to negotiate REPPA by creating a standard agreement that must be adopted and for which changes are not permitted; Mandate interconnection within a stated time frame, thereby removing the potency of strategic refusals or delays by utilities to frustrate RE power generation firms; Contribution by all consumers and a collection mechanism that works (e.g. the current collection mechanism); Specifying the feed-in-tariffs for different RE technologies, the degression rate and the duration of the FiT; and Requiring an annual periodic review and public reporting of the progress by the appointed Government agency.

(3) (4) (5)

(b)

A feed-in tariff (FiT) mechanism must be introduced

The proposed FiT rates and degression for the promotion of RE technologies in Malaysia are as follows:

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Notes: The current German tariff is 49 euro cents per kilowatt-hour (roughly RM2.50), about two and a half times the retail price of electricity. 47 Notes: In Germany the degression was 5% in 2008, increasing to 8% by 2009. 48 An intending RE power producer will only buy PV if the cost of the system is less than the sale price. This means that PV suppliers need to ensure that their prices are reasonable.

Annual Degression * 0.2% 0.2% 0% 6% 1.5% 1% 1%

*Note: Subject to final confirmation upon enactment of the RE Law.

The FiT rates were determined through extensive consultative discussions with relevant stakeholders and RE players, based on the following factors: Capital and investment cost; Equity and financing (rates and tenure); Costs of O&M, fuel, transport, insurance and depreciation; Annual cost increment; IRR, simple payback calculation, cash-flow; RE plant capacity factor and other revenues.

(c)

Setting up of the RE Fund

The fund must be prescribed by the RE Law in order that contributions can be paid to it legally. If no fund is specified then any such payments if received by Government must be paid to the Consolidated Fund or if received by the utility risked being mixed with its own funds. This can affect the legitimacy of the fund and jeopardise peoples trust in the system. The availability and size of the fund will directly determine the overall RE capacity that can be installed in each year, as well as guarantee the payment for FiT throughout the contract period. The fund is to be managed by a professional fund manager appointed by the Government, where the funds governance structure, role and responsibilities must be set out in the RE Law with no room for discretion, as such discretion can be mis-used. The payment to the power utilities for the cost of FiT (less the value of displaced electricity) shall be efficiently and expeditiously disbursed.

(d)

Contribution mechanism specified

All electricity consumers are to be required to contribute to the RE Fund and this obligation must be specified, including the mechanism by which the contribution amount is ascertained. There should be no difficulty in ascertaining the amount and a simple mechanism is best, such as a contribution system based on consumption. Thus, it is recommended that a minimum contribution rate of 2% (equivalent to not more than 0.65 cents/kWh) be embedded into the tariff pricing upon the next electricity tariff review.

Assumptions: Electricity tariff is increased by 6% in 2010 (4% for TNB and 2% for the RE Fund).

(e)

Institutional clarity provided

It is important that institutional clarity be specified so that all the agencies (EPU, ST, KTAK and PTM) are aware of their respective roles. Clarity provides institutional focus and avoids the problem of slipping through the cracks. Institutional structure must provide for clarity of functions of the various interacting agencies. The functions are suggested below. Organisation KTAK Function ST PTM Policy setting and decision making on policy matters Reporting to Parliament Coordinating the CORE (committee for oversight of RE) team Licensing of RE power producers Safety of installations Registration of competent personnel to undertake electrical works Management and approval of FiT application Determining the applicable FiT based on commercial operation data for RE power producer Evaluating technical competency of RE power producer for license recommendation to ST

Professional Fund Manager MIDA

Institutional clarity provides the basis for organisations to act, identify their boundaries and the scope of their responsibilities; without which the risk of institutional failure is high. The introduction of a RE Law that provides for the introduction of FiT is critical to the success of the new forward looking RE Policy. Such a law will not only contribute to realisation of Thrust 1, it will also have the effect of stimulating the RE Industry, R&D and human capital development (i.e. Thrusts 2, 3 and 4).

Feed-in-Tariff Law Case Study Germany (with FiT Law) is now the world leader in RE deployment, while United Kingdom (with RPS policy) has achieved limited success for the equivalent amount of cost invested. In 2006, Germany generates more than 60 TWh (87 TWh in 2007) of renewable electricity, most significantly form wind energy, as compared to only about 15 TWh by United Kingdom.

Figure 7.2: Shares of RE sources in Germany

The main driver for the significant RE deployment in Germany is the Renewable Energies Law (Erneuerbare Energien Gesetz, or EEG) which passed by the German Bundestag (Parliament) in year 2000. The history of FiT development in Germany indicates that the success in creating substantial and sustainable environmental, social and economic benefits were derived from a gradual, trial and error approach to renewables legislation, strongly backed by sustained social and political supports. As a result, the German FiT model has been replicated and adapted to the local conditions by many other European countries, notably by Spain, and recently in the UK (where the Energy Act 2008 contains provisions for the implementation of a system of feed-in tariffs for RE by 2010).

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Figure 7.3: Adaption of German FiT model by more than 15-EU Member States

7.1.2. Supporting Measures

After the enactment of the RE Law, the supporting measures that should also be implemented are as follows (additional measures that may be considered are described in Annex C):

(i)

Enter a delegation agreement in lieu of amending laws that affect State rights

To facilitate the growth of RE generation, a one-stop centre for approvals of ancillary matters should be set up to address the regulatory concern of the additional compliance costs with respect to planning permission and land use approvals at the state level. This one-stop centre is to be the Government appointed FiT implementing agency. The agency will enter into an agreement with the State Authorities whereby they should agree to delegate their approving function to the agency if certain specified conditions are met; in return all revenue collected from the processes are to be paid to them and not retained by the agency (delegation agreement). Conceptually therefore the delegation agreement would provide for: (1) Scope of agreement: Delegate authority to the Government appointed agency grant the planning permissions and land use approvals if specified conditions are met; Conditions for approval: A common set of conditions must be agreed with the State Authorities against which the agency can exercise the delegated authority to approve an application on behalf of the State Authority. These conditions must be documented in the agreement;nd th

(2)

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(3)

Fees: State Authority is to specify the amount of fees that the agency should collect from applicants, and such sums are to be paid over to the relevant State Authority. The agencys administrative costs in undertaking this is to be provided by the Federal Government; Duration: The agreement is for a finite period (say 5 years); Renewal: State Authorities must consent to renewal, not automatic; Governance: The agreement must provide for proper governance and accountability of the agency to the State Authorities.

(4) (5) (6)

The use of an agreement to facilitate the emergence of a new industry is a new and novel concept in Malaysia. Yet it provides a better and more efficient means to undertake the activity without the need to amend the relevant laws. The agreement requires the appointed agency to negotiate with all State Authorities on a common set of conditions for the grant of approvals for RE generation (and nothing else). For example land use conversion should be permitted for the installation of a RE facility of a particular size, or planning permission should be given to a PV (but not a biomass) facility within a residential area. For any matters beyond the specified conditions, the agency is to refer back to the relevant State Authority. Such an approach does not require any amendments to the laws affecting land use and planning, thereby minimising (if not totally eliminating) any concerns of State Authorities with federalisation or reduction of State rights.

(ii)

Improve environmental standards to spur innovation

Studies in the EU have shown that increasing environmental standards does not decrease economic activity but instead improves economic activity (in general) and innovation (in 49 particular) . Malaysias current environmental standards can be improved because: (1) The applicable principal legislation (Environmental Quality Act 1974), preserves and supports the externalising of cost of environmental damage, as there is no need for firms to adopt cost-effective technologies to ensure compliance is minimised thereby reinforcing a business-as-usual thinking; Despite providing for the licensing of noise and air polluters, there are no prescribed regulations which specify the acceptable noise levels or ambient air quality standards. All that has been provided are guidelines issued by the 50 Department of the Environment (DOE) in 1988 as to the air quality with respect to CO2, SOx, NOx, particulate and suspended particulate and noise planning 51 guideline issued on 2004 .

(2)

The lack of appropriate environmental regulations has the exact opposite effect as firms and businesses in Malaysia adopt least-cost options, continue to pollute (unless higher standard countries demand action) and generally consider compliance with environmental standards as unimportant (i.e. NIMBY syndrome). Once the RE Law is introduced, a support measure is to improve the environmental standards. This would have the effect of improving technology use (i.e. more efficient boilers in palm oil mills) which in turn will spur the need for R&D and business growth. KTAK should work together with the DOE to secure the introduction of these new standards.

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See The Contribution of Good Environmental Regulation to Competitiveness by the Network of Heads of European Environment Protection Agencies (November 2005) 50 See DOEs Air Quality Guideline available at http://www.doe.gov.my/dmdocuments/Udara/3%20RMAQG.pdf (accessed on 8 May 2008) 51 DOEs Noise Pollution Guidelines (2004) available at http://www.doe.gov.my/dmdocuments/guidelineBunyiBising.pdf (accessed on 8 May 2008)

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7.2. Strategic Thrust 2: Provide Business Stimulus Package

Malaysia has been successful in attracting foreign direct investment through the provision of a package of incentives tied to performance (i.e. export). Existing FDI policy that encourages the 52 setting up of manufacturing related services sector in RE should continue. According to Grant Thorntons 2008 International Business Report, the primary constraints faced by Malaysian businesses compared to East Asian businesses and Global businesses are skilled workers, demand or orders for their products or services, working capital and financing costs, as shown in Figure 7.4 below.

Figure7.4: Business constraints

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Direct actions should be taken to encourage entry into the RE market, with supporting actions aimed at stimulating demand for RE goods or services. The main actions are summarised described in Table 7.4 below. The institutional arrangement to implement this thrust effectively requires the intervention of Economic Planning Unit (EPU) to coordinate the actions of various Government ministries and agencies to develop RE as one of the drivers for national economic growth, and Ministry of Finance and Bank Negara Malaysia for financing and fiscal related actions.

Table 7.4: Summary of Thrust 2 main actions Type Financial Fiscal Description of Main Action (i) (ii) (iii) (iv) (v) Creation of an evaluation process for lending to RE power producers Continuation of existing fiscal incentives Special incentives to use locally created/developed R&D (this can also stimulate T4) Local content incentives Create an RE Centre for SMEs (this can support T5)

SMEs

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Note: This sector covers the establishments of OHQ, IPC, RDC, RO and RE and other support services such as integrated logistics services, integrated market support services, integrated central utility facilities, cold chain facilities for food products, research and development (R&D), and renewable energy 53 Source: International Business Report 2008 Malaysia, produced by Grant Thornton

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7.2.1. Creation of Evaluation Process for Lending to RE Power Producers

This action is to smoothen the entry into either RE power generation or the RE Industry sector by addressing the financial difficulties that are currently faced. RE producers have found it difficult to secure loans because the financial institutions were unaware of the nature of RE business activity. Such difficulties can be overcome by creating a RE funding evaluation process which existing financial institutions must subscribe to and apply. This is not new as there exist similar approaches for example the simplified lending process to small and medium scale industries backed by a guarantee from the Credit Corporation of Malaysia or in the provision of micro-credit. The problem faced by RE producers is not that there are insufficient funds in the capital market but the lack of skills of the financial institution to evaluate the applications and provide the funds expeditiously. The treatment of RE borrowers as a normal corporate debtor ignores the nature of the RE project; particularly with the introduction of a feed-in-tariff in the new RE Law. This provides added security to the financial institutions in lending to RE power generation projects. Through the creation of a standard evaluation process by the financial institutions, the provision of working capital to RE producers in a timely and appropriate fashion can be realised. This allows for the unlocking of the capital market for RE producers instead of Government having to provide funds to be lent to them. To create the standard evaluation process, the Government should use leading banks (at least two banks in which the Government is a shareholder) to lead the way by setting up RE financing teams who are trained in RE and can draw up the standard evaluation criteria and process to be implemented. Mandating the evaluation process can be undertaken by BNM. Additionally the banks should be given specific RE loan targets by the Government for which they are to be held accountable for failing to meet those targets. As a stand-by provision, the Government can offer financial assistance to RE power generation firms that are unable to secure funding despite there being an agreed and understood evaluation process. This financial assistance fund is estimated to be RM 500 million to be used over 5 years.

7.2.2. Continue Existing Fiscal Incentives

The set of Government fiscal incentives is not a long term or sustainable policy tool. It does have the immediate effect of encouraging the establishment of a new sector, and can have positive 54 direct impacts on the viability of RE projects by increasing the IRR and cash-flow. On the other hand, the incentive effect of some fiscal measures may be marginal, e.g. the benefits of tax relief may be considered marginal by an investor, especially when the existing corporate tax rate is sufficiently low. Therefore for the short-term the existing fiscal incentives offered should be continued. An evaluation of their relevance and usefulness to firms should be undertaken in Year 4 after the RE Law has been brought into force, to determine if any revisions are required. However by 2019 the fiscal incentives should be permanently discontinued.

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Note: The positive direct impacts are on internal rates of return (IRR) and payback periods for implementing RE projects by (i) increasing IRR by as much as 2% and (ii) reducing the payback period by as much as 3 years. The indirect effect is to lower the burden of a companys annual taxes between 32% to 53% via investment tax allowance, thus increasing the bank-ability of RE and cash flow.

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7.2.3. Special Incentives to Use Locally Created/Developed R&D

This action is related to Thrust 4. Firms that adopt and use locally created or developed R&D for RE should be granted special fiscal reliefs by the Government in order to stimulate the innovation system to produce local RE technology (of comparable quality and cost to international benchmark) by creating a demand for local RE technology by RE power generation firms, namely: (1) (2) Group tax relief so losses in one subsidiary can be used to offset the profits in another; Double deduction of the costs of the local innovation or R&D in RE technology used;

The grant of group tax relief provides the ability of a group of companies to benefit from the investment by a member of the group in RE. Hence if that member incurs a loss, such loss can be used by a profitable member of the group to reduce its tax liability. That loss can arise from low sales in a market that is still not sufficiently mature; or from the double deduction of the cost of acquiring the local innovation which changes the profit to a loss. This incentive is proposed for a period of 10 years.

7.2.4. Local Content Incentives

Manufacturers of RE finished products and components for export should be encouraged to use local material in their finished products and components. This can help develop a supply chain for the large RE manufacturers. The incentives would be: (a) The provision of double deduction of the costs of local material as an allowable expense (for domestic manufacturers only) if the local content is in excess of 50% with a proviso that this deduction is for a maximum period of 4 years; For foreign manufacturers investing in Malaysia, the incentive is to either extend their tax holiday by a further 2 years or if they have adopted an investment tax allowance, the grant of a 2 year tax holiday. This incentive is only available when the local content has exceeded 50%. The incentive is a one-time provision. Hence when the foreign manufacturer has reached 50.1% local content it can apply for the 2 year tax holiday, and nd upon the expiry of the 2 year, this tax holiday incentive is no longer available.

(b)

The local content requirement and incentive should be extended to utilisation of local services, and firms who use in excess of 50% local service providers would be eligible to a waiver or refund of all service tax paid.

7.2.5. Create an RE Centre for SMEs

This action is related to Thrust 5. The SME sector in Malaysia is a significant group accounting for 55 32% GDP (2005), 56.34% jobs created (2005) and employing 5.6 million workers . However the SME sector lacks informational assistance to venture into new areas despite having the necessary entrepreneurialism. SMEs often find it difficult to select and apply the most appropriate science and technology to grow their business or to venture into new areas such as RE generation or RE Industry.

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SME Annual Report 2007 published by Bank Negara Malaysia and available at http://www.smeinfo.com.my/index.php?&pg=286&ch=2&ac=727&lang=en (accessed on 20 Feb 2009)

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To assist the SME sector to participate in this new market, Government should consider establishing a RE Centre. The establishment of a RE Centre with clear objectives will help SMEs to engage effectively with the relevant parties in the National RE Innovation System. The Centre should focus on providing information to SMEs about RE technologies, opportunities and risks; and assist them to participate in incentive programmes, and match their interests with possible partners or providers. Such a Centre can be under the purview of PTM with cooperation from SMIDEC as PTM is better placed to advise and assist SMEs with RE specific matters as compared to SMIDEC which has overall responsibility for all sectors in which SMEs are involved in and not the RE expertise. The illustrative cost estimates for the establishment and operations of the RE Centre based on 10 personnel renting appropriate premises and having the necessary facilities is RM 20 million over five years.

7.2.6. Involve GLCs and Specifying Their RE Contributions

This action calls for Government Linked Companies (GLC) to support and participate in RE generation because they either have suitable RE resources, for example Sime Darbys palm oil plantation businesses can use the palm oil waste (EFB or POME) for power generation or that they have assets that can be shown as demonstration projects. Furthermore according to the Putrajaya Committee on GLC Transformation, the role that GLCs are to have is to be high-performing entities which are critical for the future prosperity of Malaysia. The GLC Transformation programme covers 2 additional areas, namely delivery of significant benefits to stakeholders and a strong corporate social responsibility. The rationale for getting the GLCs involved is to enable the Government to leverage these external assets to kick-start the growth of the RE generation sector, which in turn will spur the development and growth of RE Businesses. The leveraging takes the form of direct participation in RE generation either as a viable business or as a demonstration project. Such leveraging by Government of these assets is consistent with the GLC Transformation programme to deliver significant benefits to stakeholders (not just shareholders) and for GLCs to have a strong corporate social responsibility (which can be evidenced by GLCs participation in Governments socially beneficial programme). GLCs stakeholders clearly include its shareholders, but also the people of Malaysia. Providing significant benefits to the people of Malaysia will come from their actions to help improve the environment through the reduction of CO2-equivalent emissions, introduction of clean technologies and creation of new job opportunities. Without such involvement by the Government, the incentive for the GLCs to act in this manner may be missing. In order for the GLCs to be involved, it is necessary for Government to: (a) (b) Identify those who can contribute directly since not all GLCs are suitable for the undertaking of RE generation; and Specify the RE contribution by specified GLCs which should be monitored by KTAK, and made mandatory.56

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Putrajaya Committee on GLC High Performance (PCG) (http://www.pcg.gov.my) was formed in January 2005 to follow through and catalyse the GLC Transformation Program. PCG is chaired by the Second Finance Minister, with participation from the heads of the Government-Linked Investment Companies (GLIC.s) namely Khazanah Nasional Bhd (KNB), Permodalan Nasional Bhd (PNB), Employees Provident Fund (EPF), Lembaga Tabung Amanah Tentera (LTAT), Lembaga Urusan Tabung Haji (LTH), and representatives from the Ministry of Finance Inc. (MOF) and the Prime Ministers Office, to work together to monitor developments and to recommend further measures of improvements.

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The suggested approach of Government identifying GLCs and specifying the RE targets by them is consistent with a leveraging of these assets by government for the benefit of the people as a whole. These identifications and targets are summarised below:

7.2.7. Involve Existing MNCs in RE Activities

Malaysia has a significant number of MNCs that are not only environmentally conscious (such as IKEA, INTEL, Western Digital, Daimler and many others), but have their long standing relationships with local suppliers. In a sense, this is a natural asset in the country that can and should be exploited positively by Government. Government should therefore encourage MNCs to engage in RE generation for themselves and/or to exert their positive influence on local suppliers to encourage them to do likewise. This requires KTAK or the Government appointed agency to engage with MNCs to discuss ways by which they can help and what Government can offer as incentives. The incentive scheme will be formulated upon the adoption of the RE Policy.

7.2.8. Additional Measures

These additional measures are specifically targeted at building refurbishment, to help stimulate the emergence of RE Power Generation and further development of RE Industries. They should be considered as next-generation stimuli if necessary.

(i)

Strategic use of public procurement

Government should use its public procurement power strategically to spur RE generation and industry growth. Government should, in upgrading its federal buildings, include the use of building integrated RE as a requirement. This will create the demand for RE materials and skills which in turn will encourage market entry of firms. The strategic use of Governments procurement power can demonstrate Governments commitment to RE, which will in turn motivate the participation of the private sector. This can be achieved by incorporating design elements for RE technology, in particular BIPV, into the Governments (EPU) Standard and Cost guideline and procedure. This also requires the respective Government agency implementing the construction or renovation tenders to provide preference to RE technology and tolerance for the additional cost incurred which could be partially off-set by the displaced building materials.

(ii)

Rewards for new buildings (including refurbishment) that incorporate BIPV

Special rewards should be provided to commercial and agriculture building owners that integrate RE technologies (e.g. PV in building claddings) into their new or refurbishment buildings, such as: (1) Group tax relief so losses in one subsidiary can be used to offset the profits in another;

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(2) (3)

Special expenditure relief in the form of a 125% deduction of allowable expense or as part of the investment tax allowance; and Reduction of import duties and/or sales tax for RE related equipment for a 3 year period.

Whilst in an economic downturn, it is possible that building owners may take the opportunity to refurbish their buildings so as to be prepared when the economy improves. Therefore those who are prepared to do so would benefit from the availability of these rewards. The possible loss in revenue by the Government may, however, be small in comparison to the effect of stimulating the growth of RE businesses.

7.2.9. Alternative Choice of Implementing Mechanism

Instead of the usual mechanisms by which incentives are provided by Governments (i.e. where incentives are prescribed and available to those who apply), offering incentives in unique ways may be considered as the mechanism itself may provide an incentive to interested parties to be first or choose Malaysia as their investment destination. Details of the proposed alternative mechanisms are set out in Annex C of the report. Obviously more in-depth analyses of these alternative mechanisms are needed before they can be implemented.

7.3. Strategic Thrust 3: Intensify Human Capital Development

Human capital development is a key thrust because it has the potential to have the greatest impact on the country. Malaysias Knowledge Economy Masterplan identifies the importance of human resource development as it can increase the overall productivity and adaptability of the Malaysian economy which is fundamental for the transition to the K-economy, and calls on the 57 Government to build the necessary infrastructure . The focus on human capital development in this Thrust is in line with the K-economy masterplan. Recognising this, there is unfortunately a current lack of available courses that are of use and relevant to RE business. However as the percentage of those with tertiary education is small (about 13.9% as at 2001), encouraging individuals to enter tertiary colleges is a necessary step to increasing this percentage. This requires a determination of what motivates a person to have a tertiary education; and how the Government can incentivise such individuals. The proposed actions are designed to simultaneously build up the local expertise and skilled workers in RE, and to provide the right incentives for ordinary individuals to acquire new skills and expertise. However these actions are subject to a sunset condition. The institutional arrangement to implement this thrust effectively requires the intervention of Ministry of Finance, Ministry of Higher Education, Ministry of Human Resources, and other relevant Government agencies to coordinate the actions in intensifying the human capital development to meet the requirement of the RE industry.

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Additionally the Government is called to improve the function of the markets in order to unleash the creative power of markets, while the private sector should be proactive in increasing its knowledge capability and knowledge content of its activities as well as raise its international competitiveness to a new threshold.

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7.3.1. Incorporate RE in Technical and Tertiary Curricula

The availability of RE technology courses in local IHLs and training centres would need to be increased. This can be done through the collaboration with relevant ministries in designing an RE course curriculum that meets the need of RE. Certifying training courses according to the National Skills Development Act 2006 and the Malaysian Qualifying Board should also be pursued. Discussions would be required with DSD and MOHE on the course structure. This will hopefully produce graduates and technical people who would be ready to work in the RE industry.

7.3.2. Development of Training Institutes and Centre of Excellence

The availability of adequate and quality training facilities would need to be enhanced to meet the expected demand for RE courses. Such facilities also need to meet certain international standards for quality RE education and cater for technical competency and professional as well as management levels. Centre of Excellence (CoE) for RE should also be created at universities to further promote high class facility that will produce quality graduates and researches.

7.3.3. Provision of a Subsidy and Fiscal Reliefs

Providing the necessary courses at institutions of higher learning and technical training centres may of themselves not necessarily produce the necessary people skills. Since most Malaysians prize education, providing an education incentive would not only stimulate demand, it will also expedite the take up of these courses. The direct action calls for the provision of a subsidy for RE technical training and/or fiscal reliefs to individuals who pay the course fees for graduate courses in RE at institutes of higher learning, as detailed below.

(i)

Technical training subsidy

The technical training, for which the fees for RE courses are subsidised (e.g. RE technicians courses), must be certified under the National Skills Development Act 2006. There are potentially 58 232 technical training centres in and around Malaysia that could provide such RE courses, and which provides easier accessibility for intending trainees. Those individuals who wish to improve themselves will benefit from the subsidy and payment to the training institution should only be made upon confirmation that the individuals have completed the course. Timing for the payment of the subsidy is after the eligible individuals completes the course within the time limit set by the college and are awarded the appropriate certificate, and not before. This is to avoid subsidising individuals who drop-out of the course and fraud by the centre. However the centres receipt of this subsidy is still subject to income tax. An advocacy programme targeted at training centres would be used to encourage them to introduce RE technical training courses. It is necessary to engage with the Department of Skills Development (DSD), Ministry of Human Resource to secure the introduction of the RE curriculum at these training centres. The illustrative cost estimate of the subsidy is RM 100 million over 5 years.

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See Department of Skill Development, Ministry of Human Resources, at http://espkm.nvtc.gov.my/Modules/2.4_MIS/2.4.3_SearchEngine/frmSearchACCentres.aspx (accessed on 24 February 2009)

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(ii)

Fiscal reliefs for higher education

Fiscal reliefs for the costs of graduate courses should be given to individuals who undertake graduate courses in RE with a local institute of higher learning (IHL). The total fee payable in a tax year to the IHL would be treated as an allowable expense from that persons total income. Such a fiscal relief will encourage individuals to take up RE course, which will encourage IHLs to offer courses involving RE. The likely impact on Government is minimal since the number of individuals prepared to undertake RE courses may be small, yet the benefits of such incentive would outweigh its costs to Government. Table 7.5 below shows that in 2007, only 108 students undertook doctoral courses in engineering and architecture in local universities (public and private). This is but a mere 15% of the total number Ph.D students in all faculties.59

Table 7.5: Number of graduates in 2007 from local universities

Engineering & Architecture as a % of all faculties 18% 12% 15%

Only 8% of all graduates undertook a post-graduate course. Therefore if an optimistic assumption of 20% is made of all graduates in engineering and architecture who would pursue a postgraduate degree due to the fiscal relief, the likely number of individuals who would benefit would be 3,000. This will have a significant impact on the availability of RE skill sets in Malaysia, but not necessarily on the amount of tax collected. Additionally an advocacy programme targeted at IHLs would be used to encourage them to introduce RE technology courses. Both the training subsidy and fiscal reliefs should sunset over time to avoid entrenching a human capital development program that is subsidy-laden. The proposed duration of the incentives is 4 years for applications and once granted will be applicable for the duration of the course.

7.3.4. Additional Measure

Permit withdrawal from the HRDFFirms in Malaysia have been obliged to contribute a percentage of their employees salary to the Human Resource Development Fund (HRDF). Withdrawal from the HRDF is permitted if it is to pay for training at approved training facilities. Therefore if there are firms who are willing to or have entered the RE generation or RE Industry markets, these firms should be permitted to withdraw their contribution from the HRDF to pay for the cost of retraining of their personnel. This requires that facilities that provide RE skills training have prior approval by HRDF. Discussions with HRDF are needed for there to be a smooth and simple approval process for the training facility. This would reduce the financial burden on firms who are willing to enter this industry but require appropriately trained personnel.

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7.4. Strategic Thrust 4: Enhance RE Research and Technology

It must be recognised and acknowledged that whilst there are positive economic benefits to Malaysia from greater private sector investment in R&D, the principal limit to the amount that businesses will outlay is the perceived returns in the marketplace. If there is no or low returns then the private sector is unlikely to make an investment. This raises the question of the role that Government can play to stimulate R&D in RE in Malaysia, and what strategies it can employ to accomplish the mission. The state of the art of RE technology has progressed significantly when clear incentives were introduced by Government policy. However the current state of plants and equipment that use biomass as a combustion fuel is inefficient. At the same time there are some RE technologies that require indigenous R&D to be undertaken to make them viable domestically. This situation provides an opportunity for firms to enter and develop indigenous RE technology to be offered for biomass plant upgrading to improve efficiencies. R&D incentives targeting this action (rather than the sub-sector RE-biomass) would bear more positive fruits.

7.4.1. R&D Issues and Innovation System

An innovation system comprises actors, networks and institutions (including regulation), and their 60 interaction with each other. Walz et al conclude that innovation processes are shaped by the following factors:1. 2. 3. 4. 5. 6. Innovation is not a linear process, but consists of many feedback loops between invention, technology development, and diffusion; Innovation is embedded in production of knowledge and socio-economic development and institution leading to path dependency; Producer-user interaction and learning in the market makes early diffusion important; There is a need for diversity of solutions on the one hand, and selection towards a dominant design at the other; Stability of framework conditions, in general, enhances innovation processes; and Communication between actors on various levels is essential in order to disseminate knowledge and to gain new insights.

They are also of the view that the role of demand regulation arises as a key for the analysis of the relation between regulation and innovation. The interaction of the various actors in RE, as illustrated by Walz et al, is reproduced in Figure 7.5 below. It begins with (1) the demand for RE technologies, which leads to (2) the supplier of that technology and (3) investors in RE technology. RE technology demand leads to (4) transmission and distribution of electricity. The interactions are not one-way but bi-directional indicating that each can influence the other. Along each of these interactions, policy can have an influence.

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Figure 7.5: The triple role of regulation within the system of innovation of wind energy

The diffusion for the technology becomes an important aspect which influences various functions of an innovation system. Innovations in RE technologies are, according to Walz et al, shaped by regulation. Further high level of regulation is needed to foster diffusion of the technologies.

7.4.2. State of R&D in Malaysia

Research and development are essential for the emergence of inventions and innovations in society. Malaysias 2005 R&D expenditure as a percentage of GDP as reported by MOSTI is 61 0.64% . In comparison, the R&D expenditures of Singapore, Taiwan and Japan are, respectively, 3, 4 and 5 times that of Malaysia. However R&D activities are held back by insufficient funding, lack of expertise and poor coordination of R&D in research institutions. Duplication of R&D efforts is not uncommon. The lack of commercialisation of R&D in RE technologies reduces the support that R&D firms need. Effective research activity is also a pre-requisite to attracting R&D investment. Local research institutions have a poor track record of commercialisation of R&D activities, specifically RE technology. There is also a lack of coordinated research activity undertaken in RE technology by these research institutions.

Research funding focus

Government has allocated RM 4.4 billion in the 9 Malaysia Plan to fund R&D activities as shown 62 in Table 7.6 below.th

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Source: National Survey of Research and Development 2008 Report Data for Year 2006 from Ministry of Science, Technology and Innovation available at http://www.mosti.gov.my/mosti/failpdf/fact&figure.pdf (accessed on 13 Feb 2009). 62 Available from MOSTI.

Of the total RM 4.4 billion, RM 1.4 billion has been allocated for pre-commercialisation and commercialisation funding in five areas i.e. biotechnology, ICT, industry, sea to space, and S&T Core, with the 3 following areas having sub-focus areas.

There is inherently a strong focus on the funding of ICT and biotechnology R&D (as can be clearly seen by the total amount of both specific and general funds made available to these two sectors). This crowds out the good idea in RE as it must compete for both recognition and funding with other technology areas that have a high degree of Government support.

Current R&D policy actions in RE

The Government, via MOSTI, has taken steps to support R&D in RE technologies by: (a) Establishing two committees in recognition of the need for a systematic national R&D for RE, namely the RE Task Force chaired by the Deputy Minister MOSTI and RE Technical Working Group chaired by SIRIM; Identifying the focus areas of the RE technology research and R&D - namely biomass, biogas and solar;

(b)

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(c) (d)

Utilising the Techno and Science Funds to provide grants for R&D activities in new RE technologies; and Developing a specific budget for research in RE technologies.

Gaps in current actions

The current status whilst is a positive move towards supporting the Strategic Thrust 4, is inadequate because the actions are geared towards provision of money, instead of developing a conducive environment that encourages R&D activities in RE technologies. Australian approach provides valuable lessons as they have reported that the creation of the conducive environment is an important element, R&D focus should be on the activities that will help the sector, i.e. activity based focus and monitored and performance specific. In Malaysia the provision of public money by the Government may be insufficient, and the Government can play a key role to help identify the research needs (i.e. the problem to be solved) for which research funding is then made available.

Current Status of R&D in Malaysia

The public sector funding for R&D has a strong focus on the biotechnology and ICT sectors. These two sectors account for 33% of the total available funds for R&D (without taking into account the focus areas of the general funds). Pre-commercialisation and commercialisation funding is available but for five specific technology clusters. Yet these areas do not have RE as a focus area. As a result RE research is subject to a high degree of competition amongst the various technology clusters that are funded (i.e. inter competition) as well as competition amongst technologies that fall within the ambit of Alternative Energy (which includes nuclear as well as renewable energy, i.e. intra competition). As a result it is unlikely that generic funding of RE research would be successful, when such a clear preference towards ICT and biotechnology sectors exists. Further the gaps in the current approach should be addressed. The Government needs to play a leadership role to guide the private sector to be involved in R&D as the private sector: (a) Is too cost conscious (about 70% of Malaysian businesses think cost management is a main source of competitive advantage); and (b) Is not sufficiently focused on innovation as a source of competitive advantage (only 44% 63 of Malaysian businesses consider innovation as a source of competitive advantage) .

7.4.3. Develop an RE R&D Action Plan

Government should not expect the R&D activity to produce inventions, but the thrust should be considered a success if the R&D activity produces innovation. The difference between the two words invention and innovation needs to be clearly appreciated, in order that expectations are 64 clear and that funding can also be provided for innovative processes or actions.

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International Business Report 2008 country focus (Malaysia), Grant Thorton available at www.internationalbusinessreport.com 64 R&D funding is not about patent filing only. Availability of invention is a small arena of R&D activity. Innovation is the primary action of R&D. Not all innovation can be patented because of legal requirements in Patent Laws which may not be met. This does not mean that there is no protection or that there is no value to the innovation. Governments should realise this difference and R&D activities should be supported if they are to innovate the RE technologies.

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The key features of the RE R&D Action Plan are:

Features of the R&D action plan Demand articulation Feature details The problem that requires research to be done such as improving the efficiency of biomass boilers, will be identified. This is called demand articulation. Demand articulation defines the problem to be solved by the research, identification of the technology and market availability. Demand articulation should be prescribed in RE Research Flagship, which has specific objectives, framed by a good understanding of the needs of researches, users, customers and the community. This demand articulation can be played by Government since the private sector does not see innovation as a source of competitive advantage. Sunset clause: Demand articulation should be for a specific duration of 5 years, and if it needs to be extended than a debate in Parliament is necessary to amend the enabling law. Whilst initially using demand articulation will help local firms identify the market, but over time the government should refrain from doing so. Therefore the R&D Action Plan should provide for the availability of market information so firms will be able to identify market potential of research areas. As pointed out at page 68 ante, the lack of skilled workers is seen as a critical business constraint. Without adequate skilled workers R&D programmes have a low chance to succeed. Therefore: (i) Permit the importation of high quality foreign skilled workers (i.e. knowledge workers) to address the immediate shortage. (ii) Encourage local individuals to undertake post-graduate courses via the incentive programme (in Thrust 3). It may be necessary for the R&D infrastructure to be developed. Hence the action plan may require the building of an RE research lab (Centre of Excellence) which the research cooperatives can use. Provide funds by the Government; and continue with the R&D fiscal incentives is required. Funds would be subject to the performance and monitoring framework. The undertaking of any approved research needs to be carefully structured. Instead of merely giving money to a research or an organisation, designing an effective institutional framework is necessary. Design an effective institutional framework, where the joint venture of public and private sectors is reflected in a cooperative research centre, with these features (i) Close interaction between researchers and users of research; (ii) Industry contribution to the centres education programmes to produce industry-ready graduates; and (iii) As a place where higher degree programmes can be undertaken. Recipients of funds must agree on the outcomes that they are to achieve. This can be tied to the demand articulation feature. These outcomes are documented and forms part of the agreement with the Government, and become a performance obligation of recipient of funds. The recipient of the funds must be subject to a proper monitoring and evaluation mechanism that is fair, transparent and accountable. A proper monitoring and evaluation mechanism that is fair, transparent and accountable is created; without there being any risk of bias or a conflict of interests.

Market information

Resources Availability of skilled people

Resources Facilities

Resources Financial

Institutional features

Identification of performance obligations

Monitoring and evaluation framework

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Features of the R&D action plan Governance

Feature details Clear and transparent rules for awarding funds to bidders, avoidance of conflicts of interests, proper and legally binding undertakings to preserve intellectual property of bidders; accountability process and grievance mechanism. Introduce a feed-in-tariff law with the specified degression which will encourage technological innovation to reduce the RE technology cost. Clearly identifying the roles and responsibilities of the parties and their accountability.

Feed-in-Tariff law

Roles and Responsibilities

The illustrative estimates of the cost of Thrust 4, is RM 600 million to be spent on capital and operational expenditure as well as funding of R&D activities. The institutional arrangement to implement this thrust effectively requires the intervention of Ministry of Science, Technology and Innovation, Ministry of Higher Education and other relevant Government agencies to develop and implement the RE R&D Action Plan.

The RE Policy must continue to build or acquire political capital because of the long term nature of policy to bear fruits. Malaysia is unfortunately fond of showing immediate success through harvesting low hanging fruits (i.e. easy targets or more visible ones). However RE Policy is not a short term policy nor can a short term approach produce positive results. Without long term political capital the sustainability of the RE Policy may diminish, as it would not be able to attract authority and money from the political authority. Consequently a policy advocacy programme is needed that helps build political capital for the sustainability of the RE policy.

What is a Policy Advocacy Programme

A policy advocacy programme (sometimes referred to as social marketing) is a programme that is designed to provide information of the policy, its objectives and its outcomes to the stakeholders in order to achieve and sustain on-going public support. Furthermore advocacy programmes provide results to the public and political authority. The objective of a policy advocacy programme is not just about providing factual information, but the provision of information that helps build political sustainability of the policy (i.e. buy-in), and through buy-in, minimise policy resistance.

RationaleThe introduction of RE Policy is a change from the business-as-usual approach which requires different stakeholders buy-in and support. Civil society, as the contributor of the public funds, needs to be convinced that the idea of the fund and the contribution is sound, and that there is no risk that the fund will be abused. SMEs have to be similarly convinced of the value of the RE industry in order for them to want to participate. Other firms have to be convinced of the benefit of undertaking RE power generation.

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Thus different stakeholders have different interests, and it is important that these are addressed by way of tailored messages to target audiences. Nonetheless, the soundness of policy is and should be advocated as the common theme. If there is no clear advocacy programme then the very stakeholders on whom the success of the policy depends on will turn against it, and the policy is doomed no matter how suitable, appropriate or effective it may have been. Therefore the rationale for the advocacy programme is to win the hearts and minds of the various stakeholders in order to secure their willing participation for the future success of the RE policy which will bring benefits to the society.

Types of Advocacy Programmes

Awareness programmes are one type of the range of advocacy programmes that should be adopted. Another approach is the commissioning of independent evaluations that are published locally, or engaging third party public sector bodies (such as ST or PTM) to organise workshops, discussion forums, seminars or case studies or even public hearings, briefings or consultations. Social marketing is another form of advocacy programme. However all advocacy programmes are designed to achieve two objective (1) provide information but more importantly (2) secure support for a new action by Government.

7.5.1. Design an Advocacy Programme

A pre-requisite of successful advocacy is a programme design that takes into account (i) (ii) (iii) The target audience, The timing of the programme, and The message to be given.

This means that the advocacy programme has to be phased. The Table below provides an indication of the identity of the target audience and the possible message in each phase of the advocacy programme.

Target audience

Phase 1 (Understanding) Message 1. Environmental awareness and overcome the NIMBY syndrome, and commitment to environmental sustainability; RE Law, its purpose and how it benefits them; How RE benefits people; Importance of the contribution mechanism and the RE Fund. Environmental awareness, commitment to environmental sustainability RE Law and its purpose How RE benefits people Viability of funding RE projects

Phase 2 (Participation) Message 5. 6. Report back to the people the status of the RE initiatives; Inform them of the training incentives to encourage them to take up the courses; Identify the R&D programmes that they may want to participate.

Public-at-large

2. 3. 4. 1.

7.

4. 5. 6. 7. 2. 3. 4.

Schools 2. 3. 1. Banks

Environmental awareness strengthening RE Law and its purpose How RE benefits people NIMBY avoidance Viability of funding RE projects Solicit feedback on ways to improve process Do a lending process evaluation with banks

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Target audience GLCs MNCs

Phase 1 (Understanding) Message 1. Environmental awareness, overcome the NIMBY syndrome and commitment to environmental sustainability; RE Law, its purpose and how it benefits them; How RE benefits people; Importance of the contribution mechanism & the fund. Incentives on offer for improved involvement; Their involvement what can they do; Incentives on offer for improved involvement. Environmental awareness, overcome the NIMBY syndrome & commitment to environmental sustainability; RE Law, its purpose and how it benefits them; How RE benefits people; Importance of the contribution mechanism and the RE Fund. How can they become RE Businesses The role that they can play to help achieve the Thrusts The role that they can play to help achieve the Thrusts Be the champion for the RE Law, contribution and RE Fund Environmental awareness & overcome the NIMBY syndrome; RE Law, its purpose and how it benefits them; How RE benefits people; Be the champion for the RE Law, contribution and RE Fund

Phase 2 (Participation) Message 8. Make them the messenger of the various initiatives that Government is introducing. 9. Get them to encourage their suppliers to look at RE businesses as an option. 10. Showcase their RE activity

The key features of the Advocacy Programme are:

Features of Advocacy Programme Specifying champions outside KTAK within and Detail explanation These champions are people who believe in the new RE Policy and are the spokesperson on all matters relating to the RE Policy. Their enthusiasm can be harness to secure other supporters. A proper media usage plan is needed to maximise the reach of the message to all stakeholders. This way the cost of face to face meetings can be avoided completely.

Methods to use all media and the new media

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The Third Sector is the sector that is neither the public sector nor the private sector. It encompasses civil society and NGOs or any organization not within the first two.

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Features of Advocacy Programme Indentify all stakeholders Sufficient flexibility

Detail explanation All stakeholders should be identified (not just be category but by name if possible). The programme must be sufficiently flexible to adapt to changes in the social, business, economic and political climate of the country. Periodic monitoring and evaluation of the results produced by the programme is necessary in order to continue, change or revise the detailed activities of the Advocacy Programme.

Periodic monitoring & evaluation

The estimated cost of the advocacy programme over a 5 year period is RM 120 million. The institutional arrangement to implement this thrust effectively requires the intervention of Ministry of Information, Ministry of Education, and other relevant Government agencies to design and implement the RE advocacy programme.

7.6. Summary7.6.1. Impact on Policy ObjectivesThe direct main actions of each Thrust and their impact and influence on realising the five Policy Objectives are summarised in the matrix in Table 7.7.

The direct main actions of each Thrust also addressed the key issues affecting RE as identified and discussed in Chapter 3, as shown below. Thus, with the effective implementation of each of the Strategic Thrust, the barriers to RE deployment would be removed.

Design & start implementation Start

Figure 7.6: Priority and timeline to implement the RE Action Plan

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7.6.3. Direct Cost and Development Budget

The estimates of the money that Government will have to spend over the next 5 years in implementing the various Thrusts of the RE Action Plan, being moneys that that the Government will actually pay out (but excluding moneys not received e.g. tax revenue because of tax breaks or reliefs) is RM 1.5 billion.

Table 7.9: Direct costs to the Government

Thrusts T2 T2 T3 T4 T5 All Direct Costs RM 500 million RM 20 million RM 100 million RM 600 million RM 120 million Up to RM 100 million Period & Purpose Over 5 years to provide financial assistance to RE developers/companies. Over 5 years for the setup and operational cost of RE centre for SMEs. Over 5 years for subsidy towards RE technical trainings. Over 5 years for RE R&D fund and action plan. Over 5 years for RE advocacy programme. Over 5 years to develop the RE programmes and for annual baseline studies.

Note: The 2% collection from electricity revenues for the RE Fund is not included as developmental budget. The O&M cost and service fees for the utilities and implementing agencies in implementing the feed-in tariff are covered by the RE Fund. However, the cost of designing the detail of the RE Act, feed-in tariff and RE Fund mechanisms should be included as the developmental budget.

35 23.5 25.5 19 17 120

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Focused local media/ activities publications

Local study visits

Technology demonstrations

TV/ radio

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8.

EVALUATION CRITERIA & SUCCESS INDICATORS

In determining the effectiveness of the implementation of the RE strategic thrusts in achieving both the RE Policy Objectives and the Policy Vision, it is necessary to develop the evaluation criteria and identify the success indicators beforehand. This allows for: (i) (ii) The creation of a base-line (the state of play today) against which evidence can be obtained to determine if there has been any improvement or otherwise; and Proposals for changes to be made without relying on an emotional response to a situation, personal intuition or a persons feeling that something is not right.

The data obtained in subsequent years will help determine if there has been improvement from the baseline or otherwise. This then provides the empirical evidence necessary for the continued support of the policy. Detractors will be hard-pressed to argue against empirical data showing positive results. As the RE Policy is a new and forward looking policy, it is important and necessary that evaluation be done periodically. The success indicators also may be reviewed from time to time to determine its relevance and ambition of the Government. Without such evaluation, policy makers will not be able to empirically ascertain whether the actions identified for each Thrust are bearing fruit or require change mid-stream. Only through evaluation can the outcomes of the Policy Objectives be realised.

8.1. Base Lining

There is a need to undertake a baseline assessment of where Malaysia stands with regards to RE power generation, RE Industry, R&D in RE technology, public awareness of RE and skill levels. This provides the basis for future assessments and evaluation to determine whether an action is to continue, be revised or removed altogether. Developing a base line helps identify the data requirements for current and future assessments as well as data collection issues. For most of the thrusts a base line needs to be established. Undertaking baselining work would cost approximately RM 50 million to RM 100 million depending on the number of baselines to be done, the extent of the baseline and the availability of data to develop the baseline.

Table 8.1: Baseline costs (per annum) Baseline studies 1. 2. 3. 4. 5. 6. 7. 8. 9. Detail RE resources and targets (capacity and energy mix) RE technology cost Number and types of RE businesses (developers) in the country Number of RE jobs and types Number of SMEs in RE business and sector Number of banks providing RE financing, rates and terms Number of RE licenses and REPPAs Local resources and contents in applied RE technologies/ systems Number of RE importer and technology RM million per annum 2 1 0.5 0.5 0.5 0.5 0 3 0.5 0.5 0 0 1

10. Number of institutes of higher learning offering RE courses and types 11. Number of technical colleges with RE courses and types 12. Number of RE students enrolled and passed (and quality) 13. Number of locals employed in RE business

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Baseline studies 14. Number of local RE R&D applied in the RE industry (local/ international) 15. Number of R&D collaboration and joint-ventures 16. Public awareness of RE 17. Public acceptance of RE 18. Publics willingness to invest in RE Sub-total

RM million per annum 0.5 0 1 0 0 RM 11.5 million per year

8.2. Thrust 1 Criteria

The criteria for a successful regulatory framework are as follows.

8.2.1. RE SMART Targets

Based on the detailed analysis set out in Chapter 5, the SMART targets to be achieved at different points of time form the basis of the key success indicators for the RE Action Plan as set out below. A tolerance of 10% of the target is allowable and the targets also need to be reviewed periodically.

8.2.2. Number of RE Businesses

Another success criterion is the number of RE Businesses that have entered into the RE power generation and RE industry markets. An increased in number of RE businesses mean that the nature of the regulatory framework is providing the necessary incentive, clarity and support needed for their entry. Therefore data of this RE businesses needs to be collected.

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8.3. Thrust 2 Criteria

8.3.1. Performance FactorsTable 8.3 identifies the performance factors to be used to evaluate strategic Thrust 2, the weightage and the reasons for the weightage.

Table 8.3: Performance factors for Thrust 2

No 1.

Performance factors Turnover from the construction of renewable energy powered installations Jobs created New firms entering the RE business SMEs entering the RE industry Loans provided commercial banks by

Weight 0.5

Reason The nature of constructing RE power plants is not sufficiently unique to be easily identifiable. Therefore to avoid over-stating the benefit, turnover from construction industry is reduced by 50%. Key outcome is socio-economic development which is shown by these criteria. This has direct relationship with the actions Lending per se may not be attributable solely to the Actions, as firms with strong balance sheets and assets may be able to secure financing regardless of the use of the funds. Hence a 50% discount is to be applied. Key outcome is socio-economic development which is shown by these criteria. This has direct relationship with the actions This is indicative of the effectiveness of the RE Law

2. 3. 4. 5.

1 1 1 0.5

6.

Turnover industry

of

the

RE

7.

Number of REPPAs signed within a specified time period (say 1 month, 3 months etc). Local content in industrial products RE

8.

Key outcome is socio-economic development which is shown by these criteria. This has direct relationship with the Actions This is a counter-measure to local content and R&D. If more businesses are distributors then the stimuli needs to be change.

9.

Number of distributors of imported RE products

8.3.2. Develop Baseline

Identifying the performance baseline provides the basis for improvements. Increase in percentage terms of the performance factors would evidence that the actions taken to implement Thrust 2 are bearing positive results. Therefore it is necessary to firstly determine the performance baseline of the RE industry as at 2009. The baseline should obtain data for the same evaluation points as identified in sub-chapter 8.3.1 above. The development of this baseline and obtaining appropriate data from relevant agencies or surveys would provide the empirical basis for determining whether the Thrust 2 main actions are producing the outcome (i.e. Policy Objective). This is realised when there is evidence of an increase from the baseline. If there is no increase or a decrease, two follow up actions may be required:

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(i) (ii)

Change the advocacy programme; or Review and revise the actions in this Thrust.

8.4. Thrusts 3, 4 and 5 Criteria

8.4.1. Evaluation of Thrust 3Based on the main action for Thrust 3, the performance criteria should be: (1) (2) (3) (4) Number of Institutes of Higher Learning that offer courses where RE is included as the main focus; Number of technical training colleges that offer quality and recognised technical training courses in RE; The number of students graduating from the technical and tertiary colleges in the specified course (including post-graduate courses); and The number of hires by the private sector from these graduates.

8.4.2. Baseline and Periodic Surveys

To evaluate Thrust 3, a base line is to be undertaken to determine the on-the-ground situation so that it is possible to ascertain whether the introduction of technical and tertiary incentives have produced the required results. It also provides a defence to any allegation that the data is unsound. If the result is zero (as expected) then that is the base from which the programme starts.

Periodic surveysPeriodically (i.e. bi-annually) undertake a survey of the same target group (of randomly selected subjects) to determine if the programme is showing improvement. If there has been no movement or a reduction, then the programme needs to be revised.

8.4.3. Evaluation for Thrust 4

The RE R&D implementation plan should develop its own evaluative measures. However one measure that should not be used is the number of patent filings because the R&D is focused on innovation (rather than invention) and that patenting contains legal restrictions such as the concept of prior art.

8.4.4. Evaluation for Thrust 5

The method by which success of this Thrust is to be measured is through public surveys. What is analysed is the increase between survey years. Therefore if the awareness survey shows that there has been an increase from the previous year than the advocacy programme should continue.

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Base liningA base-line of the target group should be determined. This group is surveyed to determine the level of awareness of RE Policy in general and Governments initiatives. The information obtained from Phase 1 can inform the design of survey questions in subsequent years. Base lining provides a basis for determining the level of awareness, which can then be compared by subsequent surveys to see if the level of awareness is rising. This would indicate that the advocacy programme is working.

Periodic surveysPeriodically (i.e. bi-annually) undertake a survey of the same group to determine if the advocacy programme has improved the awareness, buy-in and participation of the target group. If there has been no movement or a reduction, then the advocacy programme needs to be revised.

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9.

CONCLUSION

The Government of Malaysias SREP programme has been in force now for almost eight years. Yet there is little or nothing to show in terms of achievement of the programme or the five fuel strategy. Studies and reviews have been done with the expectation that the palm oil mills would be a key participant of the programme since they had the raw material (EFB) to be used as a fuel source to generate electricity. There were many who were enamoured by this good idea it was logical, attractive and leveraged national strengths. However what appeared to be a good idea has been frustrated by the market, evidencing that Government cannot predict how markets will work or perform. It was believed that the palm oil industry would have jumped at the opportunity to use their waste to produce electricity, yet they were cautious. In fact post-implementation studies showed that these palm oil mills had in fact been utilising their EFBs for fuel to generate power for their own use. Interests however came from third party developers (something that was unexpected), who assumed that the EFB had little or no value and palm oil mills would give it away for free. Yet because these third party developers created a market for the EFB (by introducing a demand), the suppliers could sell their EFBs rather than give it away for free. This led to fuel supply agreements being needed and with severe limitations. As the target participants has always been the palm oil industry, electricity generated from using biomass and biogas were given a higher tariff (i.e. 21 sen/kWh) as compared to mini-hydro (17 sen/kWh). The tariffs were not calculated based on full cost recovery method or using any applicable economic principles or methods. It was based on (at best) a guesstimate. There are many different technologies that can be use to generate renewable energy such as mini-hydro, solar PV, geothermal and wind. R&D activities in these areas are generating newer, cost-effective and innovative solutions and technologies. This is an area which Malaysia can participate in. As the end of the 9 Malaysia Plan approaches, the timing is right for there to be a new RE Policy. It is no longer appropriate to make ad-hoc or piecemeal policy. This opportunity provides the avenue for a complete overhaul of the existing RE policy in order to promote a sustainable and forward-looking renewable energy development in the country. Sufficient policy experiences exist today in many countries such as Germany, Spain, Italy, Japan, Korea and even developing countries such as Thailand; compared to the situation a few years ago. Therefore as the recommended RE Policy is clear, robust and forward looking together with the planned introduction of the renewable energy law which includes the provision of a mandatory feed-in tariff and RE Fund; there will be significant and positive impacts on the economy of the country, as evidence from the case studies from other countries who have introduced such measures. Consequently it is forecasted that new businesses will emerge, new jobs will be created and new growth areas will be developed, leading to Malaysia becoming the leading country in South-East Asia in renewable energy and its technologies. The Renewable Energy Law requires an Act of Parliament to be introduced before it can be effective. This is a key and fundamental thrust of the RE Policy. It is the foundation upon which the success of the entire policy rests. If such an Act of Parliament is not introduced or is delayed, then there would be no conducive regulatory environment that is needed to spur the growth of RE in Malaysia. In fact the environment would be no different than the one that exist currently. The RE Law is the foundation upon which Thrusts 2, 3 and 4 sit, indicating that without the RE Law it would be difficult for these Thrusts to produce results, be successful or gain traction amongst stakeholders. Whilst the overlay of the advocacy programme shows that Thrust 5 is necessary to bring on board all stakeholders to support the changes introduced the RE Policy. This is graphically represented below:

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RE PolicyRE Business Stimulus Package Human Capital Development

RE R&D Action Plan

With regards to Thrust 4 Enhance RE research and technology; a specific R&D plan needs to be developed that will spur R&D activities in renewable energy technologies. This plan will include an amount of funding to be provided by the Government. With regards to Thrust 5 design and implement an RE advocacy programme, a properly thought out advocacy programme with clear messages being sent is necessary rather than merely undertaking advertising campaigns or other obvious and simple actions which has been proven in various psychology studies not to work. The policy requires effective and reasonable evaluation criteria that provide a basis for determining whether the policy has been successful or not. Therefore detailed SMART targets are proposed for both energy and capacity targets that RE is to achieve at various intervals. It is anticipated that 13% power capacity and 10% energy generation will come from RE by 2030. This would avoid 131 million tones of CO2 being produced by the conventional power generation sector. Therefore the estimate of the direct cost of implementing the various thrusts including developing the baselines for proper evaluation is RM1.5 billion over a 5 year period (this cost does not include the contribution to the RE Fund). In addition, there are other criterion that have been designed to be used to assess the success or failure of the other thrusts, including undertaking of a baseline assessment, so there is appropriate evidence of the state of play today. There are however, other policy areas, such as conventional energy price subsidies, the energy market in Malaysia, mass and public transport systems, vehicle taxes, biofuels and environmental standards and pollution, that should be addressed if renewable energy is to be promoted wholeheartedly and as a main-stream energy source for Malaysia. These areas are under the purview of other Ministries and agencies and are outside the scope of this Report. In conclusion the success of the forward-looking RE policy is dependent not only on the action and support of the Government but also of the private-sector and the Third sector (i.e. NGOs etc.). The RE Policy must be seen by all stakeholders as producing public value, sustainable from a political and legal standpoint and must be administratively feasible. Only when all of these elements are in place can and will the policy be successful.

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ACKNOWLEDGEMENT & REFERENCES

[1] Allocation under 9MP available at Ministry of Science, Technology and Innovation [2] Bartel and Lichtenberg (1987) The Comparative Advantage of Educated Workers in Implementing New Technology, Review of Economics and Statistics 69 (1987), pp 1-11, [3] Caselli and Coleman (2001) Cross-Country Technology Diffusion: The Case of Computers, American Economic Review 91 (2001), 328, [4] Chapter 4 Prevention and Control of Pollution and Environmental Degradation of the National Policy on the Environment 2002, available at http://www.doe.gov.my/dmdocuments/natonal%20policy/National%20Policy%20on%20the%2 0Environment%20on%2010.19.151.21/dasar.pdf (accessed on 8 May 2008) [5] Department of Skill Development, Ministry of Human Resources, at http://espkm.nvtc.gov.my/Modules/2.4_MIS/2.4.3_SearchEngine/frmSearchACCentres.aspx (accessed on 24 February 2009) [6] Design of the PTM Zero-Energy Building in PTMs Energy Smart, Issue 0017, Quarter 1. [7] DOEs Air Quality Guidelines available at http://www.doe.gov.my/dmdocuments/Udara/3%20RMAQG.pdf (accessed on 8 May 2008) [8] DOEs Noise Pollution Guidelines (2004) available at http://www.doe.gov.my/dmdocuments/guidelineBunyiBising.pdf (accessed on 8 May 2008) [9] Doms, Dunne, and Troske (1997) Workers, Wages, and Technology, Quarterly Journal of Economics 112 (1997), 253 - 290, [10] Energy Information Administration (2005), Policies to promote non-hydro renewable energy in the United States and selected countries, U.S. Department of Energy [11] Ernst & Young (2008): Renewable Energy Country Attractiveness Indices [12] Federal Environmental Agency (2006): Monitoring and evaluation of policy instruments to support renewable electricity in EU Member States - Final Report [13] Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, Germany [14] GLC Transformation programme are available at http://www.pcg.gov.my/index.asp (accessed on 25 Feb 2009) [15] Graduates from private and public tertiary centres (2007) published by Ministry of Higher Education, Malaysia available at http://www.mohe.gov.my/web_statistik/index.htm?navcode=NAV038?m=3&navcode=NAV038 &subcode=SUB001&lang=ENG (accessed on 24 Feb. 09) [16] Information on landfill etc provided by Jabatan Sisa Pepejal, Ministry of Housing and Local Government (2008) [17] International Business Report 2008 Malaysia, produced by Grant Thornton [18] International Energy Agency (2008): Deploying Renewables Principles for Effective Policies [19] Jobs in Renewable Energy Expanding by the WorldWatch Institute available at http://www.worldwatch.org/node/5821?utm_campaign=vsonline&utm_medium=email&utm_so urce=green_jobs#notes (accessed on 17 Feb 2009)

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Annex A: Current SREP Programme Guidelines

A.1. Annex ADuring this initial phase, SCORE will adopt the following Guidelines in promoting the development of grid-connected small RE power plants: 1. SREP shall apply to all types of renewable sources of energy, including biomass, biogas, municipal waste, solar, mini-hydro and wind. 2. Project developers will have to negotiate the Renewable Electricity Purchase Agreement with the relevant Utility, including the selling price on a willing-seller, willing buyer basis, based on take and pay. 3. The RE electricity producer shall be given a licence for a period of 21 years, to be effective from the date of commissioning of the plant. 4. RE electricity producers will be responsible for all the costs of the grid-connection, the relevant Utility system reinforcement (electric cables, transformer, switchgears and other protection equipment) and the necessary metering installation. The distribution grid interconnection shall be made at a voltage between 11 33 kV. 5. The small RE power plant shall be located within a distance of 10km from the nearest interconnection point. Exception is given for hydro power generation project. 6. No stand-by charges shall be levied. However, if back energy is requested by project developers, it will be charged accordingly with the prevailing tariff. 7. Power generation through co-generation technology shall be given special preference. 8. Maximum capacity of a small RE power plant designed for sale of power to the grid shall be 10 MW. A power plant can be more than 10 MW in size, but the maximum capacity that will be allowed for power export to the distribution grid will be no more than 10 MW. 9. The small RE power plant must be ready for grid-connection within 12 months from the date of approval for such grid connection. This is applicable for existing plant that wishes to connect to the grid. However, in the case of proposals for setting up new RE power plants (or where re-powering is proposed) that require the installation of new boilers or turbo-generator systems, the plant shall be commissioned within 24 months. The stipulated period of construction until commissioning shall be counted from the date of signing of the Renewable Electricity Purchase Agreement (REPA) between the developer and the utility. 10. The RE power plant must meet all environmental regulations set by the Department of Environment (DoE), and the developer of the project is responsible for obtaining the necessary approval of DoE, and any other statutory approvals required. 11. The minimum of 30% equity in an RE power plant project must be by Bumiputera shareholder(s). Foreign agency/company is allowed to participate in SREP project with maximum participation equity of 30%. Source: Extract from the KTAKs website66

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KTAKs website available at http://www.ktak.gov.my/template01.asp?contentid=252&tt=1&parentid=13 (accessed on 11 February 2009)

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Annex B: Renewable Energy Feed-in Tariff (RE-FiT) Law

B. B.1. Annex B What is a Feed-in Tariff (FiT) Law

Renewable energy (RE) Feed-in Tariff (FiT) is a mechanism that allows electricity that is produced from RE resources to be sold to power utilities at a fixed premium price and for a specific duration. A Feed-in Tariff Law has proven to be the best available mechanism for accelerating the uptake of renewable energy in grid-connected areas. Furthermore, a good FiT system is a truly democratic policy because: It is cost-effective for the public to generate their own clean electricity; It returns the control to generate electricity to the people.

B.2.

What is not a FiT Law

There are many kinds of support mechanisms promoting electricity supply from renewable sources, with various names, all over the world. Whilst they can be combined with FiTs, it is important to distinguish FiT Laws from these other mechanisms e.g. quota systems and tender schemes (see B.9 for further details).

B.3.

How do FiTs work

FiTs oblige energy utilities to buy renewable energy from producers, at a mandated price. By guaranteeing access to the grid and setting a favourable price per unit of power, FiTs ensure that renewable energy is a sound long-term investment, for companies, for industry, and for individuals, thereby creating a strong economic incentive for investing in renewable energy.

B.4.

Who pays for the FiTs

The most common method for funding the FiT involves sharing the costs amongst all endusers (electricity consumers). The result being that the increase in price per household is very small among the users.

B.5.

What are the benefits of a FiT Law

When designed effectively, FITs are proven to: Reduce CO2 emissions by replacing fossil fuel-based power production with clean, renewable sources of energy. Create jobs, for example in 2006 the German renewables industry employs around 234,000 people. Almost 60% of which were employed as a direct result of the German FiT Law. Help secure domestic energy supply, enabling countries to reduce their reliance on imported fossil fuels. Guarantee investment security for renewable energy investors. Drive technological innovation. Provide fair market conditions for renewables, which without this renewables would be unable to fairly compete with heavily subsidised conventional energy.

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B.6.

Impact of Feed-in Tariff: Example of Germany

The German Government pioneered in the year 2000 an effective FiT mechanism that is now replicated in many countries around the world (e.g. Spain, Greece, France, Italy, Portugal, South Korea, Switzerland, etc, for the full list please refer to B.8 post). An evaluation in 2007 by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) identified the main impacts of FiT are as follows: (1) By 2006, Germany achieved 12% (30,924 MW) of RE share in the gross energy consumption as compared to only 6.3% (11,448 MW) in year 2000 (see Figure B.1). In 2006, more than 230,000 people have been employed in the RE sector due to the rapid development of the RE industry. By 2006, the German RE businesses are leading the world with 15% of global market share with trading values equivalent to 22.9 billion. In 2006, the German Government has avoided the external cost to manage green house gas (GHG) emissions by as much as 3.4 billion due to the electricity generation from RE. By 2005, the average electricity production cost for RE has reduced to 0.1 per kWh and expected to reduce further to 0.07 per kWh by 2020. Between 2000 to 2006, 9.4 billion of economic benefits have been derived from the FiT policy against the cost of 3.3 billion to implement the FiT.

(2) (3) (4)

(5) (6)

Development of electricity generation from renewable energies in Germany, 1990 - 2007

Electricity generation [GWh]

*Solid, liquid, gaseous biomass, biogenic share of w aste, landfill and sew age gas; StrEG: Act on the Sale of Electricity to the Grid; BauGB: Constuction Code; EEG:Renew able Energy Sources Act; Electricity from geothermal energy is not presented due to the negligible quantities of electricity produced; Source: BMU-Brochure: "Renew able energy sources in figures national and international development", Internet Update, KI III 1; Version: 15.12.2008; provisional figures

Figure B.1 Development of electricity generation from RE in Germany

B.7.

Common Criticisms towards FiTs

FiTs are often rejected for being interventionist, for interfering in the free market, and for being inefficient or ineffective as a result. In reality, all renewable energy support mechanisms are interventions in the market. What makes FiTs unique is that they have proven to be the most effective mechanism for increasing the uptake in renewable energy, and the best at

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creating market growth. It is also worth noting that those who argue that FITs are interventionist frequently advocate some form of quota system or renewable portfolio standard. However, quota systems are just as interventionist: while FiTs fix the amount to be paid for the electricity, and allow the market to determine the amount of electricity generated; quota systems fix the latter, and allow the market to determine the former.

Alternative Non-FiT Mechanisms

Under Quota Systems, the Government sets a target for renewable electricity production that increases over time, building a market for renewable electricity. Most Quota Systems allow the target to be met by producing the renewable energy directly or by purchasing credits. For the trade of those credits an additional mechanism called Tradable Green Certificates or Renewable Energy Certificates or Credits is usually established.

Examples of Quota Systems in the United States: In the United States, Quota Systems are called Renewable Portfolio Standards (RPS). For example, California's RPS requires 20% of electricity for retail sales to be produced from renewable sources by 2010, and increases the requirement to 33% by 2020. [California Energy Commission website: http://www.energy.ca.gov]. Texas's RPS required 2,000 MW of additional energy from renewable sources by 2009. When Texas met that goal, the RPS then increased to require 5,880 MW of electricity from renewable sources by 2015 (of which, 500 MW must come from non-wind resources) and 10,000 MW in renewable energy capacity by 2025. [Texas State Energy Conservation Office website: http://www.seco.cpa.state.tx.us].

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Examples of Quota Systems in Europe: In Europe, the systems are called Quotas, and are usually combined with a mechanism for trading renewable energy certificates (Tradable Green Certificates). For example, the Renewable Obligation for England and Wales requires all licensed electricity suppliers to provide a percentage of their electricity from renewable sources. It sets an escalating target, increasing to 10% by 2010, and 20% by 2020. Electricity suppliers can buy Renewable Obligation Certificates (ROCs) to meet the required percentage or pay a buy-out price for each MWh of nonst st compliance (34.30 per MWh for 1 April 2007 to 31 March 2008). [UK's Renewables Obligation website: http://www.ofgem.gov.uk].

Tradable Green Certificates (TGCs), known as Renewable Energy Certificates or Credits (RECs) in the United States, are a tradable verification that a certain amount of electricity was produced from renewable sources. Renewable electricity producers are given certificates for renewable electricity they produce. Producers sell these certificates separately from the electricity that is produced. Buyers of these certificates most often use them to meet a required target under a Quota System, but can also purchase them to be green. The terms TGC, RPS, and Quota are sometimes used interchangeably in Europe to refer to systems with a quota target and tradable certificates available to help meet that target.

Tender SchemesTender schemes (or competitive bidding) are offers (or tenders) for renewable electricity producers to supply renewable electricity up to a target predefined by the Government. Producers put forth bids and those with the lowest prices are awarded long term contracts or power purchase agreements. Tendering can be used to meet any target, such as those under a Quota System.

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Annex C: Additional Measures to Support Strategic Thrust 1

C. Annex D

C.1.

Amend building codes and UBBL to include use of building integrated RE systems

A review of existing building codes and in particular the UBBL is necessary to determine what changes (if any) should be made so that building owners will integrated renewable energy systems (e.g. use of PV for cladding) into their building designs. For the non-residential buildings, this can be achieved through the inclusion of MS 1525 (Malaysian Standard: Code of Practice on Energy Efficiency and Renewable Energy for Non-Residential Buildings) into the UBBL, and subsequently can be extended to the new residential buildings. By including such design requirements into regulation, future designs of new buildings (or even refurbished buildings) will take into account the integration of renewable energy systems, which can spur introduction of RE power generation systems (thereby supporting the achievement of the SMART RE targets) and further stimulate the entry of new support and service businesses in the RE Industry.

C.2.

Introduce a building rating system (Green Building)

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Regulation can be used to require that buildings be subject to a rating system and certified. Hence buildings which are certified can claim to use energy more efficiently when compared to conventional buildings, contribute directly to the introduction of RE, have healthier work and living environments (which contributes to higher productivity) and improved employee health and comfort. The demand for healthier work and living environments can provide strong incentives to developers to comply. Countries such as Singapore, USA, Australia, and Hong Kong have introduced a national building rating system along the lines of LEED. The introduction of a building rating system can help the realisation of green buildings in the country and specifically the utilisation of renewable energy systems within the building or the use of renewable energy itself. This building rating system can be made mandatory at a later stage for new and refurbished buildings, so that the owners will have their buildings rated. No criminal penalty should be imposed for failure to meet the standards, but instead incentives should be given for achieving a green rating.

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A common building rating system is the Leadership in Energy and Environmental Design (LEED) Green Building Rating System. In Malaysia, the Green Building Index (GBI) is being developed by PAM and ACEM and would be launched in first half of 2009.

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Annex D: Alternative Incentive Offering Mechanisms

D. Annex D These are details of the 2 conceptual proposals referred to in sub-chapter 7.2.9 of the Report (relating to Thrust 2), which may quicken the pace of investment or increase the attractiveness of investing in Malaysia.

D.1.

Offering Mechanism 1: Declining Incentives

st

This mechanism is referred to as the 1 Mover Advantage Mechanism. In this mechanism, the type of benefits or incentives are specified by Government and fully made available to applicants through a specific time window. After the lapse of the specified time-window, the benefits or incentives are still made available but the scope is reduced (by value or by type of incentives offered) all latecomers. Such a programme is designed to motivate firms to compete to be first-movers in order to receive the full range of benefits. Coupled with a sound and proper evaluation of applicants, such a programme could result in specified RE policy targets (e.g. MW capacity or job creation) being met by efficient first movers. Some of the st conceptual details of the 1 MAM are:No 1. Key Details Package of benefits or incentives Details Scope of benefits: Fiscal; financial, people, land and construction of RE plant (part of climate protection initiation). These incentives can be combined for the incentive package to the 1st movers. 2 years Incentives reduced e.g. fiscal benefits reduced from say 100% tax exemption to 60% tax exemption; financial assistance withdrawn Limited to 8 years (4 cycles of 2 years each)

2. 3. 4.

Time period to apply before reduction Incentives for 2 movers

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and subsequent

Programme lifespan

D.2.

Offering Mechanism 2: Personalised Incentives Mechanism

This mechanism is referred to as the Personalised Incentive Mechanism. This mechanism works on the basis that as it cannot be ascertained ex ante as to the exact package of incentives or benefits that firms may want, it may be more efficient to allow interested firms to bid for a package of incentives that they would need in return for meeting Governments targets in RE or the Policy Objectives. Successful bidders do not receive the grant of the incentives or benefits unless they start to show that the required performance and specified outcomes are being achieved. Key details of bidding system for the PIP are:No 1. 2. Key Details Frequency of offer of incentives Bidding rules Details at least bi-annually or tri-annually Investors submit closed bids for incentives to be provided (where they specify the incentives); incentives are tied to performance; performance must achieve the outcome; outcome specified by KTAK which is tied to RE Policy, and incentives granted when evidence of performance is made available (ex post) Necessary to ensure trust in the process; need transparency to build trust Evaluation process made transparent, without any party politics being involved; KTAK must be empowered to provide the incentives asked for by winning bidders. This requires legislative provision. The incentive programme is to be sunset after a defined period or when a particular outcome is achieved (e.g. number of jobs) where the private sector will continue with the investment regardless of the incentives Only genuine players who can contribute will participate.